Citigroup Bull Vertical Put Spread
On my dough account I purchased a bull vertical put spread on Citigroup (ticker symbol C). According to Schwab, this strategy consists of simultaneously purchasing and selling put options at the same expiration date but different strike prices. The bull-version of this strategy is profitable for an upward movement when a put is sold at one strike price and then another is bought at a lower strike price. The higher strike put sale has a higher premium so the result is a net credit to the account.
Maximum profit is thus limited to this credit spread and occurs when the underlying security price rises or stays above the strike price of the short put at expiration.
Maximum loss is equal to the difference between the strike prices less the credit.
Maximum profit is limited to the net premium received.
While I have made some more speculative long-term options plays in the past (i.e., a WPRT LEAP), my likely major use of options will be in income generation.
March 12, 2014 C Bull Vertical Put Spread
Sell to Open 1 C Mar 28 2014 47.0 Put
Buy to Open 1 C Mar 28 2014 46.0 Put
Max loss: $75 (47-46-0.25)
Max profit: $25
Probability of profit (POP) (at time of trade): 67%
Break-even price: 46.78
It is possible to close out the option (for a price) before option expiration. This can be done to lock in a profit or limit a further loss. Being my first vertical spread, I am going to watch this one play out to expiration. As of today, my POP is 73%, and I could close out the option today for a (very small) profit if I had wanted.
2014 Realized Cumulative Option Income/Loss: $0
2014 Return-on-Capital: 0%