02-04-2011, 11:18 AM
I know it can seem that way, but in fact you are fully covered - no margin is needed. Let me give you a non-Apple example (cos I know everyone gets sick of Apple).
I bought a Jan 2012 $20 call on INTC (Intel) for $2.44, and sold a January 2012 $22.50 call for $1.28. That means I paid $1.16 ($116) a contract, and I bought 7 of them for $812.
The key here is that you match up a bought call with a sold call. You're right, if I still hold the call I sold on Jan 2012, and Intel has rocketed up to $30, I would have to provide them with 100 Intel shares. But...I wouldn't have to buy them at $30 - remember I also have a $20 call I own, allowing me to buy 100 shares at $20. As long as you hold both options to expiration (or sell them at the same time), you are completely covered.
The way it works is, assuming you hold to expiration (which I don't plan to), if Intel is under $20 at expiration, both the options are worthless. I lose whatever I paid for the spread ($812 in this case). That is the maximum I can ever lose.
If Intel is over $22.50, my call I own will always be worth $250 more than the call I sold. So I will make (for my 7 contracts) $1750 minus what I paid ($812) equals $938 - a 116% return.
If Intel is somewhere between $20 and $22.50, the gain or loss will be somewhere between those two numbers. My break even number is $21.16 ($20 plus the amount I paid per spread, which was $1.16).
And all that is invisible to you, handled by the broker - you don't actually have to physically deliver shares to anyone.
INTC closed at $21.57 yesterday, so I'm above my break even point. The stock has to rise 4.3% in the next 11 months for me to hit the full payout level ($22.50). So the stock rises 4.3%, but you make 116%.
The downside of course is that if the market tanks you lose whatever you put in. If it stays exactly where it is right now, I'll make a small profit on most of my spreads.
I bought a Jan 2012 $20 call on INTC (Intel) for $2.44, and sold a January 2012 $22.50 call for $1.28. That means I paid $1.16 ($116) a contract, and I bought 7 of them for $812.
The key here is that you match up a bought call with a sold call. You're right, if I still hold the call I sold on Jan 2012, and Intel has rocketed up to $30, I would have to provide them with 100 Intel shares. But...I wouldn't have to buy them at $30 - remember I also have a $20 call I own, allowing me to buy 100 shares at $20. As long as you hold both options to expiration (or sell them at the same time), you are completely covered.
The way it works is, assuming you hold to expiration (which I don't plan to), if Intel is under $20 at expiration, both the options are worthless. I lose whatever I paid for the spread ($812 in this case). That is the maximum I can ever lose.
If Intel is over $22.50, my call I own will always be worth $250 more than the call I sold. So I will make (for my 7 contracts) $1750 minus what I paid ($812) equals $938 - a 116% return.
If Intel is somewhere between $20 and $22.50, the gain or loss will be somewhere between those two numbers. My break even number is $21.16 ($20 plus the amount I paid per spread, which was $1.16).
And all that is invisible to you, handled by the broker - you don't actually have to physically deliver shares to anyone.
INTC closed at $21.57 yesterday, so I'm above my break even point. The stock has to rise 4.3% in the next 11 months for me to hit the full payout level ($22.50). So the stock rises 4.3%, but you make 116%.
The downside of course is that if the market tanks you lose whatever you put in. If it stays exactly where it is right now, I'll make a small profit on most of my spreads.
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Currently PvPing in the stock market
Currently PvPing in the stock market