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Strategies & Market Trends : Option Spreads, Credit my Debit -- Ignore unavailable to you. Want to Upgrade?

To: Scott who wrote (1565)	8/1/2000 6:13:11 PM
From: pvz	Respond to of 2317

Scott, Firstly, in your max reward, you need to account for the initial outlay of $1200, which brings your profit to $1400. That is a return of 116%. Not bad. Second, did you consider the same construction with puts instead of calls? Using the same QQQ expiry date of Jan 2002, you could sell the jan 115 for 30.75, and buy the jan 89 for 16.75. $1400 would be credited to your account, which is the maximum reward, and the maximum risk is $1200 (2600-1400). That makes it the same construction as the one you describe, except with the puts, you get the money upfront and it can be put to use elsewhere. At say 6% interest for 18 months, you would earn $126 with the puts, whereas you would have to pay at least $108 for the calls, for a total difference of $234 (which is 19.5% of the $1200 outlay). Hope that helps without being rough! Philippa

To: Scott who wrote (1565)	8/1/2000 9:36:56 PM
From: KFE	Read Replies (1) \| Respond to of 2317

Scott, Is it really this simple, or not quite? Yes, your understanding of the risk/reward is correct. As Philippa Sion stated it is usually more efficient to do the equivalent put credit spread but you will tie up an amount of buying power equal to what the call spread would have cost. When doing LEAPS spreads you have to be willing to hold for an extended period. LEAPS are thinly traded and have wide bid/asked spreads so they should not be used for short term trading. Also, the spread will not vary much in the short term even with a significant move in the underlying. For example, if MOT went up $10 tomorrow the spread you posted would only gain about a $1 1/2. It seems at this point that it's really just a wait and see game, hoping it doesn't fall below the initial call price, but if it does at least the loss is hedged. A better description might be to say that the loss is limited not hedged. I personally prefer OTM vertical spreads because you are profitable if the underlying stays the same, goes in the anticipated direction, or goes slightly against the anticipated direction. Regards, Ken