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Strategies & Market Trends : BEFRIEND THE TREND Short-term Options Trading Thread -- Ignore unavailable to you. Want to Upgrade?

To: Ken Adams who wrote (3641)	6/12/2003 3:02:00 PM
From: Bridge Player	Respond to of 4058

Ken, here is an example of a diagonal spread, using a 7-month call on the long side. Calpine is trading as I write at $6.70 The January 2004 2.5 call is 4.20 bid at 4.40 asked. The July 2003 7.5 call is .40 bid at .45 asked. If you buy the call at 4.40 and sell the 7.5 at .40 your net cost is $4.00. At 7.50 or above at expiration the spread is worth 5.00 minimum, assuming no time premium left in the Januarys. That is a 25% gain in 5 weeks, less commission. At that time you could close, roll the short side, whatever. On the downside, the stock must go below 6.50 at expiration for you to lose money. The opportunities at a wide range of ending prices should offer chances to sell an August, or October, or simply close out. Calpine has had quite a run and I like the fundamental story still.