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Last week we decided to keep following our mock trade on Activision (ATVI) so that we could see how a credit spread worked from start to finish. However, early last week we noted that we would have likely gotten out of this trade when it moved above our exit point. As it sometimes happens, ATVI has since turned south, creating a situation where the spread may finish in the max profit area. Often, traders stay in trades hoping for things to turn around even when they shouldn’t. I want to make it clear that it is important to get out of a trade at our exit point. However, these articles are not here to provide readers with a free trade, but to teach the concepts of the strategies discussed. Though this trade moved into a profitable situation, it is still better to exit when originally planned to take the emotion out of the trade. Beside, it is much more common for a trade to continue losing money rather than turning around and becoming profitable. This being said, let’s take a look at what has happened with this mock trade.

Below is the week-to-week data for our bear call credit spread:

11/12/02
ATVI Bear Call Spread
ATVI @ 19.97
Buy 10 Dec 22.50 Calls @ 1.00
Sell 10 Dec 20 Calls @ 2.00
Net Credit = 1.00 or $1,000
Max Risk = $1,500
Breakeven = $21

11/19/02
ATVI Bear Call Spread
ATVI @ 18.77
10 Dec 22.50 Calls @ 0.35 (bid)
10 Dec 20 Calls @ 1.20 (ask)
Net Credit = 1.00 or $1,000
Profit/loss = 0.15 or $150
Max Risk = $1,500
Breakeven = $21

11/26/02
ATVI Bear Call Spread
ATVI @ 20.39
10 Dec 22.50 Calls @ 0.55 (bid)
10 Dec 20 Calls @ 1.55 (ask)
Net Credit = 1.00 or $1,000
Profit/loss = 0.00 or $0
Max Risk = $1,500
Breakeven = $21

12/03/02
ATVI Bear Call Spread
ATVI @ 20.90
10 Dec 22.50 Calls @ 0.50 (bid)
10 Dec 20 Calls @ 1.70 (ask)
Net Credit = 1.00 or $1,000
Profit/loss = 0.20 or $200
Max Risk = $1,500
Breakeven = $21

12/10/02
ATVI Bear Call Spread
ATVI @ 18.12
10 Dec 22.50 Calls @ 0.00 (bid)
10 Dec 20 Calls @ 0.35 (ask)
Net Credit = 1.00 or $1,000
Profit/loss = 0.65 or $650
Max Risk = $1,500
Breakeven = $21

As the data shows, ATVI currently shows a profit of $650 out of the max profit of $1,000  possible. With just over a week left until December expiration, the trade will get closer and closer to the max profit as time passes—that is, as long as the stock stays below $20. If the stock moves above $20, we could then roll the trade forward to the next month. But, we would only want to do this if our view of ATVI is still down.

Let me go over the process of rolling forward again, so that there isn’t any confusion. The first thing we would need to do is check the prices for the January options. If we still feel the stock is going to move lower, then we need to run the numbers. First, we have to figure the price to close the December options. Then, we add all the numbers together to get the final figure. We got a $1 credit for the initial credit spread. We would take this and add it to the credit for selling the January spread. Then, we need to subtract the cost for closing the December spread. If we can roll this forward for more credit or for only slightly less than the original dollar, then it might be worth rolling. The last thing we want to do is roll a trade forward only to add more risk. If the risk increases by more than $0.20, then we should just take our losses and move on.

Once again, credit spreads are advantageous because they profit 2/3 of the time. This is because a profit is achieved if the stock moves in two of three directions. However, there is added risk to trading credit spreads that we need to be aware of and willing to accept. In the 1980s, traders made a lot of money selling naked puts, but this ended up being a disaster when the crash of 1987 hit. However, we can still profit from credit spreads much like we would from naked puts or naked calls, but without the huge risk.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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