The following is an excerpt from my July 20, 1998 note to Members.
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July 20, 1998
Members,
Another expiration Friday has come and gone....It's that time again when I remind those of you that play the [Bear Credit
Spread] table to not let your guard down. That is because, once again, the [Bear Credit
Spread] table performed outstandingly. Even the post for SEEK, which finished above
the strike price, provided plenty of opportunity to
trade it successfully. Personally, I sold 10 Infoseek 30 Calls for $3 on
6/12. That same day I bought 10 Infoseek 35 Calls for $1 3/4. When the
news came out on 6/18 and caused Infoseek to rally, I sold the 35 Calls (the long position)
for $5. This left me in a naked postion (short the 30s -- at about $7+). However,
I wasn't too concerned because the news that was "expectant" (ie, causing the fat
premiums in the first place) had now been published. The next day, 6/19, I bought back
the 30s for $4 5/8. Thus I lost $1 5/8 per contract on the 30s and made $3 1/4
on the 35s...for a net of about $1,500 (on what otherwise would have been about a 1 point
loser assuming you sold the 30 for $3 and bought the 35 for $1 3/4 -- since the 30 expired
worth about $2 and the 35 expired worthless.)
7 out of the other 8 [Bear Credit Spread] trades were straight out winners
without having to do anything fancy. If you are using this table and entering into
the "naked" position, always buy the protective option so that you aren't truly
trading naked. It's simply not worth the risk no matter how many winners you have in a row.
Sincerely,
Eric J. Aafedt
CoveredCall.Com, Founder
Double A Venture, LLC, Member