New Trade in $XOM, Option Basics – Call Calendar spread and Call Credit Spread.

So far, so good. Mr. Market picked up where it left off on Friday, further bolstering the view that this quick 10% down draft is a market correction and not the start of a Bear Market. SPY bounced off the 200-day moving average and throughout the day the VXX and UVXY pulled back. 

Today I’m gonna detail a new small position I opened in ExxonMobil otherwise known as XOM. 

Last Friday on Options Action, Carter Worth, the ChartMaster, made a pretty compelling case for opening a long position in XOM. He said it was overwhelmingly oversold and the risk is more to the upside than the downside. 

Mike Khouw recommended a call spread, specifically a debit call spread, buying one March 77.5 call and selling a March 82.5 call for a debit of $120. 

Today at the close this spread would have cost a bit more, about $130. 

I opened a combination spread (all numbers below will have included commissions): 

  1. I opened a call calendar spread. I bought an April 80 call for $151.40 and sold a March 80 call for $83.10 – this cost $68.30. This is a debit spread, it costs me money. It has no margin requirements, that is money does not need to be set aside for this trade.  
  1. I opened a call credit spread. I sold another March 80 call for $83.10 and bought a March 82.5 call for $38.80 – this results in a credit of $44.30 
  1. This trade resulted in 3 positions, 2 March calls and 1 April call. This trade resulted in a debit if $24 for each contract combination and requires $250 to be set aside. 

This is a VERY cheap way to get into a long position in XOM.  

Should XOM stay below $80 by March expiration, I will have a April 80 call that I paid $24 instead of $151.40. 

A bit more complicated, but much cheaper.