This is a Call spread, but I prefer to call it as a binary trade as a way of conceptualizing. Today evening Facebook (FB) will announce their earnings and traders at StockTwits are very optimistic and are speculating to go $60! . Dr. J from CNBC is also optimistic. So based on general market pulse, I make the following trade:
Date/Time: 30-Oct-2013/Afternoon
FB at 48.96
Trade: Bull Call Spread
Buy 1 FB Nov 15'13 50.0 Call
Sell 1 FB Nov 15'13 52.5 Call
Premium (debt): 94 cents
Expectation: If Facebook has good earnings, it will at least go to 55 and I can profit $250-$94 =$156. If Facebook has bad earnings, it will be definitely below 50 and I loose $94.
The way I look at look at Bull Call Spread is like purchasing a Call. Since Call at ATM are pretty expensive and secondly, I am not so greedy, I sell a Call further to purchased Call. This will limit my profit but also greatly reduce my premium.
The Price to P&L graph looks like this:
Red vertical line is current price of FB, Dashed horizontal near shows current PL. Green curve is PL curve at T=0.
Blue line is PL curve at expiration. Magenta, Red, and Brown shows PL curve for next 5, next 10 and next 15 days respectively.
Let us see what happens. I will update this trade
Date 3-Nov'13
FB at 49.59
The earning came out flat (During the Earning announcement After Hours the stock went as high as 15%, just to come down to 0% in half hour).
I like to get out of the trade and will look for any rise next week and will exit if I make $50 profit or else take loss and get out.
The P&L graph is as follows:
Green/Blue is the P&L curve for current/exipration day. Magenta and Red shows PL curve for next 7 and next 14 days respectively. Vertical red line is the current price of FB
(Note: the previous P&L is incorrect as I assumed the expiration on 22Nov, instead of 15 Nov)
