"Risk Free" Debit Spread Explained - Example on $AAPL

[@JakeBroe]

This is about as complicated as it gets as far as options strategies! If you want to learn trading options and start from a more fundamental level, then check out my playlist on trading options to learn everything you need start to finish in order. kzbin.info/aero/PLscTZuOqKWIxSZzy4ObKWDznEsCot_1HU

[@xiaobiaoxu5984]

Good stuff as always, not sure if "Risk free" is the right word unless you hold the cover call toward expiration (or close both). But it is good move: to capture all the potential upward movement (as long as below $195) plus the extrinsic value. What do you think of this comparing to selling a short term cover call (or your poor man's cover call ...), I guess the difference is that long-term call (long or short) is always safer?

[@lslurpeek]

It gets more complicated than this!

[@muffemod]

JAKE I DID THE OPTIONS SPREAD AND NOW I'M BACK IN THE GREEN! 💚

[@edyraper]

To all of the boobs: This is trade as a whole was not "risk free". He made it risk free after he made a very risky bet on AAPL back in the day and the LEAPS turns out to be profitable. Then he just hedged his further gains. Which is a smart move, but the title and they way he sell to us is a bit misleading.

[@azizmehdi]

Thank you. Have a great weekend.

[@JakeBroe]

You as well Aziz! Have a great weekend!

[@daveclark6324]

What is important to understand, and I know that Jake knows this, is that the risk in this trade is in the initial portion of the trade (buying Jan 2023 calls). If that goes in your favor, only then are you able to turn this into a risk free trade by capping your upside. Certainly great position to be in. 👍 Thanks Jake

[@DicksonMaimouth]

Didn’t he mitigate the risk when he sold the three call contracts at $175?

[@DicksonMaimouth]

Mitigate, yes. What I meant to say was “eliminate.”

[@daveclark6324]

@@DicksonMaimouth Yes. All I was trying to explain is that a trade was not initiated with zero risk. He purchased three call contracts and held them for a while (over 2 months). Then he was able to alter his trade to have zero risk.

[@JakeBroe]

That is correct Dave! I converted a long call in to a trade in which I can no longer lose my initial investment. I de-risked it in affect.

[@flowerpt]

This thread! Thanks.

[@dinero99]

Great content Jake !!

[@coreyperez13]

Super interesting. I'm glad you stated that this is "as complicated as it gets", because I'm still thinking "huh"? I've started watching your older vides as you mentioned in a previous (recent) video / Playlist below!. Thanks!

[@chetankumarc8871]

How is it 'risk free' if u entered two legs of the trade at different times ? It was a naked call initially, u got lucky on the movement and then u shorted, so in short it was a gamble later turned to hedge..

[@deviambati3805]

Hello Jake, you are really great and cool person who cares so much for the members. I am very happy to find you after an year of searching. I too have APPL long call (jan 2023), but confused whether to use debit spread for the same expiration as the contract or to do vertical spreads (poor man covered calls). I will watch the video again to understand the math in terms of p&L. Thank you Jake for answering all my previous questions. Hats off to your dedication

[@JakeBroe]

Thanks Devi! I appreciate that!

[@OptionC.]

Jake, thanks for the detailed explanation of your setup. I have several AMD and SOFI leaps (at least 90 deltas expiring 2024). I’ve been selling monthly calls against them when they experience at least a 10% gain in a day, which has happened several times already. Now, I will try selling Jan 2023 calls to capitalize on 1) higher premiums for the longer days of expiration, 2) for the continued market volatility (at least through the first rate hike and/or increased inflation over 7%). Be a bank - collect premium!

[@5k4_5k4]

Wow this is a very interesting strategy, thanks so much for this explanation

[@gflem]

Thanks Jake this is excellent. I wanna keep watching

[@brianoconnor6337]

How come it known as a debit spread when the purchase premium for the long call was $18.66 and the sell premium for the short call was $20.14 isn't that a $1.48 credit? Always great content Jake!

[@martinhnetynka8252]

Agreed, great content, but same question.

[@ryandrake3006]

This is a non-traditional debit spread. Usually you make these trades at the same time, which would normally be a debit. In this case Jake waited until his call had gained significant value to enact the other half of a typical debit spread, giving him a credit and thus a risk-free trade.

[@kanegs1]

As Ryan states below, a 'traditional' Call debit spread is when you Buy the lower price strike, and Sell the higher price strike, which usually incurs a 'Debit' (as opposed to Selling the lower, Buying the higher, receiving a credit, hence a Credit Spread). You usually do these at the same time...but because Jake waited for the stock to actually increase in value, along with his call that he bought, he then took advantage of the growth and executed another trade (selling a higher price strike), which in technical terms you can view it as a 'Debit' Spread. Only due to the rise in premium values did it end up being a credit at this point in time.

[@brianoconnor6337]

@@ryandrake3006 Thanks. If AAPL tanks and they both expire worthless would he get to keep the credit of $1.48x100x3=$444 ?

[@amitsarkar3468]

Great Explanation Sir

[@LV-ei1ce]

I do this all the time. Its not risk free lol. Its just timing the market :) One suggestion I would give us.. When you buy back the sell calls and make money, re invest by pushing your buy calls deeper in the money (from 150 -> 135 ?, it will be less than the 15.00$ for that trade for sure especially when market is in high fear, as the deeper ITM has higher delta)

[@lanceg79]

Are you planning a similar “risk free” move on those spy calls in your fidelity?

[@JakeBroe]

No, I just sold to close them on Thursday. $8,000 gain in less than 2 weeks.

[@sorryxsenor]

Good stuff Jake. I have a list of winners that are overbought I will try this with next week.

[@leekar3]

Jake, by doing the sell to open call option you're just making extra premium and hoping to buy to close. If the apple price soars, you have protection in that you have a buy to call option to cover the shares that might get assigned from you to sell to the buyer. Right?

[@FarNorthAdventure]

This helps! Will be referring back haha!

[@taybouhari]

Great video. 👍👍👍

[@lslurpeek]

What's also good about this is yor get your buying power back to do another position. Imagine if you had like 10 different risk free trades going.

[@warofhero]

What happen if someone exercise the option that you sell early for dividend or stock splits? If you have no money to buy 300 shares to cover it, does broker buy them for you with their money and close it?

[@DicksonMaimouth]

Geezuz! 😂 I need to watch this again. This has nothing to do with your explanation, Jake. You’ve explained it very well, but I got tripped up about halfway in, and I need to review it a couple of times for the entire process to fully sink in. Thank you.

[@JakeBroe]

This is about as complicated as it gets. Not even many regular options traders would understand what I am doing. This isn't for everyone, lol.

[@EfLuis]

Keep up the great work man!

[@JakeBroe]

Thank you Luis! Cheers!

[@xrpbluemarvel2566]

Hi Jake wanted to ask you one question have you ever thought about buying semiconductor stocks and which ones

[@ConanNYC]

very smart strategy to lock in profits

[@nandocame620]

Jake, 11min nice idea buying back short cheaper but what would you do if it continues below150 long

[@ACR4008]

Jake- I really like this strategy. Would you consider creating a diagonal debit spread as you “leg in” to this trade while eliminating your risk? In other words, would you consider selling your calls at a shorter time to expiration? This would allow time to decay your price to close. Your collected premium would be a bit smaller but your chance to keep more of it might be higher.

[@rusticmade]

Jake that was an excellent video. I apparently am starting to follow and understand what is going on and how to get in and out of contracts. I've been Jake trained! Think I'm confident enough to give options trading a try......I am curious how you keep track of all your trades? My friend uses paper like a bookie interested to see 👀 how you do it. Thank again for sharing your knowledge 🙏

[@jacksonlee6979]

Sounds like a good plan!

[@JakeBroe]

Thanks Jackson! Cheers!

[@ichoudhury007]

Excellent overview Jake. Looking forward to see more videos similar to this as you continue these type of trades. So you usually decide on Debit Spread like this after a long call option gains substantially?

[@JakeBroe]

Yeah, either just sell to close it or else sell calls against it.

[@keymo2195]

Strong play‼️

[@VillonJr.]

Jake, now that I had this video to look at over the weekend, I get it. I had to apply to level 2 on Schwab. But again, you have given us gold. Please, if you do anything with this contract. Why not do it live?

[@Steppshow11]

Hey Jake..after watching this video. How can you sell 3 contracts of Apple when you said that you dont own 300 shares. I thought the only way you can sell covered calls is to own 100 shares per contract. Did I miss something in your video?

[@MotoFinances]

I was thinking of buying more shares on Facebook. I'm currently down 6,000 dollars. I want to buy more because I think it's going to recover and also, I want to sell cover calls on it. What do you think Jake?

[@diepthaibao]

Is it better to sell those 3 contract monthly?

[@JakeBroe]

You would net more premium from theta decay, but you also risk being assigned and triggering your long calls for a loss of the remaining extrinsic value.

[@missyb7311]

Great educational content as always. I've sold covered calls and I've been buying calls and puts. I don't have a margin account. In a cash account I can sell covered calls. Would I be able to do what you've done? The tier/level options I have doesn't allow spreads (takes a margin account), but you're sort of doing a covered call. But not really.

[@JakeBroe]

Hey Missy! No, I think you need margin enabled in order to do anything other than covered calls and cash secured puts. If you enable it, you never have to borrow money, it's just a function of the account to accommodate large trades which would occur with a vertical spread.

[@TWCH]

You left the Air Force, yes? You should grow a beard, long hair, maybe get your nose pierced, something Vegas-ey lol:)

[@joshd.6820]

My assumption, and maybe a dumb question, you'd want your sold call strike price to be above your purchased call break even price? Similar to a regular covered call.

[@JakeBroe]

That is correct Josh!

[@allenwhycheng]

Isn't this like poor man's covered call?