This All-Star Commentary post features two recent Trade Notes (leg 1, leg 2) from Boca Bobby. From all of us in the TradeKing Community - thanks for taking a moment to contribute, Boca Bobby. Swing by the office anytime!

Boca Bobby,

Thanks for sharing your recent activity with your fellow traders. So that everyone is on the same page, I will sum everything up here. Let's go to the Rookie's Corner!

ROOKIE'S CORNER

Trade 1: Bought 2 NUE March 60 calls @ 4.16

Long Call - Play #1 (Education > The Options Playbook > The Plays > Play #1)

The goal of the long call is for the stock to increase almost immediately and therefore be able to liquidate the position (sell the call) for more than the price paid (higher than 4.16). At expiration the position will be profitable when NUE is above the break even point. This is calculated using the strike price and the call premium: 60 + 4.16 = 64.16.

Note: If the stock is below 64.16 at expiration, the trade will not be profitable. If neutral is part of your outlook, this is not the trade to apply.

Trade 2: Sold 2 NUE March 65 calls @ 1.85

Short Call - Play #3 (Education > The Options Playbook > The Plays > Play #3)

When used as a single position, the goal of this trade is for the stock to decline, or generally speaking to just stay below the strike price. Because this is another call trade, the breakeven is calculated the same way as Trade 1. Take the strike price plus the premium: 65+1.85 = 66.85.

Note: This trade can be used when Bearish or Neutral if the call is ATM or OTM.

The combined position becomes: Bought 2 NUE March 60-65 call spreads @ 2.31

Long Call Spread - Play # 13 (Education > Options Playbook > The Plays > Play #13)

This spread gives you the right to buy stock at Strike Price A and obligates you to sell the stock at Strike Price B if assigned. This play is an alternative to just buying a long call. Selling a cheaper call with higher Strike B helps to offset the cost of the call you buy at Strike A. That ultimately limits your risk. The bad news is, to get the reduction in risk, you're going to have to sacrifice some potential profit.

The term "Long" in this case refers to the premium - as in this is a debit trade. The debit is calculated by subtracting the two call prices, as one is a cash outflow and the other is a cash inflow. The debit is 4.16 - 1.85 = 2.31.

This will lower our break even point for the spread, which is an improvement over the long call: 60 + 2.31 = 62.31. If the stock is above 62.31 at expiration, the overall position will be profitable. If the stock is above 60, but below 62.31, the trades netted together will result in a loss. Selling the March 65 call is a great way to reduce your risk. Nice job!

A few things to keep in mind...

BREAK-EVEN AT EXPIRATION

Strike A plus net debit paid.
 

THE SWEET SPOT - your upside target of 65

You want the stock to be at or above Strike B at expiration, but not so far that you're disappointed you didn't simply buy a call on the underlying stock. But look on the bright side if that does happen - you played it smart and made a profit, and that's always a good thing.
 

MAXIMUM POTENTIAL PROFIT

Potential profit is limited to the difference between Strike A and Strike B minus the net debit paid. 65 - 60 = 5 - 2.31 = 2.69
 

MAXIMUM POTENTIAL LOSS

Risk is limited to the net debit paid and will occur at 60 or below.
 

MARGIN REQUIREMENT

After the trade is paid for, no additional margin is required.

To assist with the understanding of the above information, I have included an image from our Profit & Loss Calculator (Tools > Profit+Loss Calculator).

Click here for a larger image. 

In the short term, our Technical Analysis tool (see below) is agreeing with your bullish outlook (Quotes+Research > Technical Analysis). Many use this kind of analysis to make better investment decisions. Keep in mind this is merely a forecast and not a guaranteed outcome.

Click here for a larger image. 

If the stock were to reach 65 or higher, your return on investment (ROI) would be highly coveted by the Community. This is calculated by taking the profit (the return) and dividing it (on=over) by your cost (the investment). Potential ROI = 2.69/2.31 = 116%.

I see that you have activated this feature...thanks for being open with your fellow traders! This is new (in Beta form) from TradeKing. Check out K-Man's blog for more information.

When we calculate ROI, we are considering the happiest of endings. We must also keep in mind that losses may occur in any trade. Unfortunately, potential ROI is not an indicator of a successful outcome. Darn!

Thanks again for allowing others to look over your shoulder with this trade. Maybe I'll see your name on the ROI Leaderboard!

This comment and any market data included here was prepared on 2/15/08.

--Nicole Wachs

TradeKing Staff

All-Star Commentator

Options involve risk and are not suitable for all investors.

Please read Characteristics and Risks of Standardized Options.