On July 10, 2020, we sold a bull put credit spread on AAL stock with expiry in the next 28 days.
Here is our trade setup:
- BOT 1 AAL AUG 07 '20 - 10.5 + 9.5 Put Bull Spread -0.31 USD
For this trade, we got a premium of 26 USD (after commissions) or a 2.47% potential income return in 28 days. Almost a dollar per day!
These trades come as the #10 and #11 in the month of July, and if we stick with our trading plan for this month, premium generated from this trade setup makes us about 3.71% from our $700 monthly goal, while in total we have already reached 29.11% from our monthly goal.
It was agreed to sell credit spread, to save on cash locked for margin. Selling 1 dollar wide credit spread we had to put on lock about $89. If we were selling just a put our margin impact would be about $250. Selling credit spreads can help save on margin impact.
What happens next?
On expiry date (August 7, 2020) AAL is trading above $10.5 per share - options expire worthlessly and we keep premium - if AAL trades under $10.5 on the expiry date, we get assigned.
But as we already have collected a premium of 0.26 per share, our break-even price for this trade then is $10.5-$0.26 = $10.24
In other words, AAL can fall from the current price of $11.90 way down to $10.24 and we will still be break-even
As we are selling credit spread here, in case AAL suddenly drops bellow our second bought put at the strike price $9.5 it will help to mitigate risk, in other words - selling credit spreads has some advantages.
- Running Total 2 Trades since July 10, 2020
- Trade P/L $26