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Tracking Directional Credit Spreads from Last Week. Apple, Boeing, Amazon.
4 min read

Tracking Directional Credit Spreads from Last Week. Apple, Boeing, Amazon.

Tracking Directional Credit Spreads from Last Week. Apple, Boeing, Amazon.

Overview

When people think directionally on stocks, several tools at their disposal come immediately to mind, stock, single leg options, or debit spreads. As a round-up to several posts last week I wanted to focus on a particular directional strategy often detailed here, the credit spread. The credit spread is often thought of as a somewhat neutral strategy, but when thinking in terms of a price target, it can, and should be thought of side by side with those other more common strategies as a directional trade.

A Primer

First, let's talk about something that trips a lot of people up about credit spreads. A credit spread and a debit spread are the same thing. What? I'll explain. The credit or debit is simply which side of the trade you are on. Here's an easy way to keep it clear in your head. If a spread is $10 wide (the distance between the two strikes) and trading $4, you can either sell the spread at $4, or you can buy it for $4. The spread can be worth $0 at expiration, or $10, or anything in between. If you sell the spread at $4 you want it to go to $0, and make $4. If you buy the spread for $4, you want it to go to $10, and make $6. Anything in between, it's the distance from $4 that determines profit/loss.

Ways to Play

First example, from Wednesday April 29th, into Microsoft earnings. (link) MSFT was ~176.60. A bearish price target of ~167 with May 15th options. From OptionsAI technology: Selling the 177.50/185 call spread at $3.05.

Here's the trade now, with the stock ~177, it's worth $2.79:

As you can see the stock, is slightly higher than entry, yet the trade is a small profit. The updated metrics show it's still in a good place with some room higher where it's still profitable and a lot of profit potential even if the stock went sideways as indicated by "if stock expired here". Meaning its current value of 2.79 would be worth $0. That means the stock needs to "not go higher" for max gain.

Next Amazon, it was ~2375 a few days before earnings when this was posted Monday April 27th (link). A bearish price target of ~$2200 with options expiring on May 15th, from OptionsAi technology: Selling the 2380/2540 call spread at $64.

Here's the trade now, with the stock ~2305, it's worth $24.60:

The stock is lower, but not even to the price target and it shows nice gains and very high probabilities of continued success. Of course those updated metrics need to be weighed against current gains on a trade to determine when to exit. The updated expected move helps a lot with that, and the decision when to take profits or cut losses versus market expectations.

Finally, let's look at a slight loser. Boeing. BA was ~129.40 the day before earnings when this was posted Tuesday April 28th (link). A bullish price target of ~$145.50 with options expiring on May 15th, from OptionsAi technology:

Selling the 129/115 put spread at $5.35. With the stock now lower by nearly $2 at 127.62 this short put spread is barely a loser, worth 5.48:

As you can see from the "if stock expired here" it would go from a loser to winner of the stock closed here on expiration. That shows that time is on its side. The Probability of profit is still in its favor (as long as the stock doesn't go below its breakeven).

What we see on all these trades is taking theta away as the main risk to a trade into a vol crushing event like earnings. These are still directional trades, but they swap the outsized reward of long single leg options for higher probability. Of course the risk/reward ratio means you have to have more money deployed to make less, but when comparing that to stock or single leg options, it's certainly something to consider for a trading arsenal when thinking directionally.

Give OptionsAI technology a try with your own price target in AAPL HERE

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