Calendar spread: I don't expect QQQQ to go over 50 by Feb expiration.

Nehemiah,

Welcome to the TradeKing Community! Thanks for sharing your trade with us.

As you mentioned in your Trade Note, in this current market it seems like it will not be difficult for the Qs (QQQQ) to stay under $50 between now and Feb expiration. However you should be aware that although there is an upper limit for the Calendar Spread, there is also a lower limit. These amounts are called the Breakeven Points.

If the underlying (QQQQ = 46.55 as of close 1-15-08) is between these points, the calendar spread will likely be profitable. Please check out the image below of our very own Profit and Loss Calculator. I have also included a table of the important numbers for this trade. To access this tool, please go to Tools > Profit + Loss Calculator.

Strategy:

Call Calendar Spread

Long leg

Bought Mar 50 C @ 0.98

Short leg

Sold Feb 50 C @ 0.39

Entry

0.59 Debit

Max loss

0.59

Max gain*

1.05

Lower breakeven*

47.34

Upper breakeven*

53.41

*using P&L Calc; assumes IV = 25%; as of close 1-15-08.

I'd also like to highlight some features that are available to you here at TradeKing. Our "Options Guy" Brian Overby regularly writes a blog about options trading. He has an interesting series on Calendar Spreads which starts here: http://community.tradeking.com/members/optionsguy/blogs/2567-long-calendar-spreads-part-1

We also have a great book: The Options Playbook. There is an online version available in our Education section. Use this link to jump to the section on Long Calendar Spreads https://www.tradeking.com/PrivateView/edu/opb/opbLongCalendarSpreadCalls.tmpl

After you have a chance to review this information, please come back with any questions you may have. There are several other resources you may find helpful in our Learning Center (under Education).

As with all of our tools, they are provided to help you make better decisions. However, you will ultimately decide whether or not to put your money at risk in the market.

Market data included here is as of the close on 1/15/08.

Once again, welcome! We are happy to have you!

--Nicole Wachs

TradeKing Staff

Training and Education Manager

Commenting on Trade Notes is something that TradeKing will be doing from time to time. You may want to check out my most recent posts:

http://community.tradeking.com/members/victork/trade_notes/3854-bought-nly-at-18-70

Stock trade discussing Market Grader and Probability

http://community.tradeking.com/members/k-man/trade_notes/3833-bought-to-open-1-qml-bv-at-0-20

Option trade discussing low delta calls

http://community.tradeking.com/members/jim-bradley/trade_notes/3825-bought-to-open-6-contracts-of-xlf-cy-at-3-55

Option trade discussing high implied volatility, vega, theta, and long call spreads

Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options .

Click here for larger Profit and Loss Calculator image.

Click here for larger Profit and Loss Calculator image.

Thank you for your comments. I've read Option Guy's calendar spread blogs and his article on being assigned. (I have also been through the play book and used the P&L Calculator before placing the trade.)

After reading Option Guy's article on being assigned, I decided to go a little further out of the money than I originally planned. Since there appears to be substantial resistance around 49, I thought 50 would be safe but I have to admit that I'm not sure what the chances are that I would get assigned if it did go over 50 before February expiration.

Nehemiah,

Great to hear you are diving in to our site. I appreciate your concern in possibly being assigned on your short call. Although impossible to predict, assignment may be anticipated by monitoring the extrinsic value of an ITM option. The greater the extrinsic or time value, the less likely an assignment is to occur (and vice versa). As you are aware when holding a short option, assignment may occur at any time for any reason.

--Nicole Wachs

TradeKing Staff

Training and Education Manager

Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options .

Nehemiah,

Those are great questions. Brian Overby has a great blog series on early exercise and assignment. http://community.tradeking.com/members/optionsguy/blogs/2063-early-exercise-part-1 

Keep in mind that whenever an option is exercised, the stock is traded for the strike price, resulting in either a long or short stock position. If there is any time premium (a.k.a. extrinsic value) left in the option that is exercised, that value will be lost instantly. If you were assigned, you may decide to hold the stock position, but you would need to either cover the cost in full, or meet the margin requirement if you had a margin account.

Margin terms may by reviewed using this link: http://content.tradeking.com/wiki/download/attachments/1819/Margin+Agreement.pdf  

Commissions and fees may be reviewed by using this link: https://www.tradeking.com/PrivateView/services/Services/commissions.tmpl

--Nicole Wachs

TradeKing Staff