Email – #478

A few months ago we entered into two spread trades because the uncovered options were just too expensive. By using a spread we reduced our cost and risk to very reasonable levels.

The first was Petrobras, where we bought the Jan. 2011 $30 calls (VDW AF) for $7 and sold the Jan. 2011 $45 calls (VDW AI) for $3.70 for a net cost of $3.30. At the time PBR was in the $20s. Today PBR is over $40, and our spread is trading for a net profit of $7.30 – a return of more than 120%.

Buy back the $45 calls and sell the $30 calls, and cover this spread and book the profits now.

Our second spread was in Freeport McMoran Copper and Gold (FCX-NYSE). Again, we entered the spread by buying the Jan 2011 $30 calls (OBQ AF) at a price of $9.40 and sold the Jan $50 calls (OBQ AJ) for $4.40 for a cost of $5. Today FCX is trading over $50, resulting in a net profit of $10.45 on the spread based on the current bid of $28.40 on the $30 calls and an ask of $18 on the $50 calls.

Buy back the $50 calls and sell the $30 calls, and take profits of more than 100% now by covering your spread.

Congratulations!! And, please let me know how you did on these trades by sending me an e-mail message to editor@mtvernonresearch.com .

Karim