The interesting thing I notice about today’s market is while the market (SPX 1647.27 =13.50) is higher by almost 1 percent today, the CBOE SPX Volatility Index (VIX) cash (13.82 +0.17)and VIX May and June futures are also higher today.  Most traders are used to seeing the VIX volatility index fall when the market rallies.  The conventional wisdom being when the market rallies investor worry lessens and implied volatility goes down.  So what is going on?

Volatility is movement and movement in the market can be lower or higher.  I am seeing the upside calls beginning to “catch a bid” which raises the premiums in the out of the money calls as investors perhaps are pointing to possibly even higher gains. Any increased demand (prices paid) for upside call options can have a positive impact to the matrix of implied volatility on which the VIX index is based.

Fear and Greed are the two psychological drivers of markets.  I see institutional traders being fearful of not participating in a bull market, and other traders possibly getting greedy, thinking the opportunities to make money are to the upside now.  There is nothing that says we cannot have an upside market crash.

This increased demand for out of the money calls is likely creating the current unusual state of Market higher … VIX higher.

The massive amounts of liquidity being pumped into markets by global central banks amounted to “monetary Red Bull”, and investors should fear what comes after the rush.

“Financial markets are really feasting on an anticipated Japanese flavored Red Bull,” he told CNBC on Monday.

“Monetary Red Bull can feel good for a while, it doesn’t have many calories, but it does have some negative consequences down the road,” he said.

To me, a lot of the concern in these policies should be focused on the bond markets.  The central banks are directly impacting the slope and level of the yield curve.  It is true that some amount of the loose money is ending up in the stock market, but in terms of what can happen when the music stops, at least stocks have some protection when it comes to inflation through potential pricing power, and the balance sheets of multi-national companies are actually better than those of the governments buying their own debt.  Once the fed stops buying long-dated treasuries, whose balance sheet do you want to make a bet on?

There is no questioning the fact that over the last few months the markets have consistently marched higher, and that implied volatility in the market has continued to hover near multi-year lows.  As an investor, part of your job is deciding whether or not you think anything is going to change this dynamic over the next 3, 6, or 12 months.  If your answer is basically, no, you are probably still going to be relatively fully invested in the market.  However, with volatility where it is, you might want to consider doing some things slightly differently in case you aren’t right.  If you currently hold a diversified portfolio, you might want to buy some downside broad-based index puts on a portion of your portfolio to provide some cushion if there is a large market move lower.  You also may want to switch from owning the stock, to owning in-the-money call options that have a built in stop below the option’s strike price.

If you are much more nervous about the state of the markets, maybe you want to start looking at some strategies that are more bearish over some amount of time.  You could buy put calendars where you own longer dated puts and are short things closer to expiration (assuming that you feel there is still some window of market euphoria).    This is a timing play.  You finance some of your investment in longer dated puts with shorter dated ones.  If the move is sooner than you think, you have risk with the short puts.  Obviously, if the market continues to rally, you are probably going to lose the premium of the spread.  You can also start to buy downside put spreads, or sell call spreads that are to the upside in order to have strategies that are more likely profitable in a down market.  For more information about these and other strategies please reference our webinar archives.

Below Calendar Put Spread:

May-June 153 put spread today and at May expiry:

Calendar spread at May expiration:

Here is how you do it.  The Manage accounts tab is found in the lower right corner of the OH platform.

Clicking will open the Manage Accounts window.  Note that this window handles many aspects of your trade experience.  This is where you come to manage alerts, transfer funds, change rates, account information, as well as locate your confirms and statements and to launch our tax software Maxit.

The focus on this article is on the preferences you can control for the Trade ticket.

Here you can set your defaults for everything pertaining to how your order ticket will automatically populate:

1. Order Type
    a. Limit
    b. Market

2. Duration
    a. Day
    b. GTC
    c. Immediate or Cancel

3. The Price Type for your Limit order
    a. Cross the Bid/Ask
    b. Join the Bid/Ask
    c. Mid-Market

Of the first three selections they deal with both Stock and Option tickets and this is one of the most important defaults.  Automatically the order ticket when you populate the order from either the Quote line, the Position Pane, the Option Chain or any of the clickable Blue Text, the limit price will reflect how aggressive you wish to work your order.   Crossing the Bid/Ask means if you are buying your limit price will be the current Ask price, if selling the limit will be the Bid side of the market price.  Joining the Bid/Ask sets your limits on the Bid price if you are buying, the offer (Ask) price when selling.  This is the least aggressive for getting an immediate fill.  Or my favorite Mid-Market selection will choose a Limit price between the current market’s Bid and Ask.  Of course you can modify the limit by a penny or two once the ticket is created if desired.

4. Stock and Option Max Quantity
    a. You can set your own personal maximum number of shares the “Fat Finger Warning”.

The maximum number of shares which traders can execute on one ticket is 50,000 shares the maximum number of options is 4000 contracts.  I don’t know about you but that is more than I care to trade (without being warned).  This can be set to deliver a warning window to pop when you are trading in larger size then this default.  You can still quickly click “OK” to continue but it is a good warning to make sure it isn’t your thumb picking the size of the order and you are in control.

More importantly:

5. Default Quantity for Options and Stock
    a. You can set your default size for your opening orders in Stock and Option trades

Most traders open are like me creatures of habit.  They tend to trade the same underlyings in the same size.  On the manage accounts tab you can set this default size for both stock and option tickets.  This will automatically populate your new opening ticket with this default quantity.  Closing trades when created from the Position Pane, Risk Viewer or the Option Chain will auto-populate with the full amount of your current position for speed of order creation and execution.

6. Bracketed order defaults
You can pre-set how wide your OCO limit prices are created when using the Advanced Bracketed Order type.
    a. The limit order (target profit) above the current market for a buy bracketed order
    b. The Stop price (stop loss) below the current market for a buy bracketed order
    c. Your initial limit order will be set at the default price limit and quantity you set as your defaults

Bracketed orders are an advanced order type which creates an OTOCO order on the same security, option or stock.  Many traders employ ‘Brackets’ around every opening position which will allow them to harvest any potential gains if the security rises to their limit price and cut their losses if the security’s price falls to their stop price.  For more information about complex advanced orders please view the following archived webinar: Trading Complex Orders on OptionsHouse

To become a faster, more efficient trader, I strongly encourage you to take the time to set your trading preferences on the Manage Accounts tab, because FAST MATTERS!

Steve Claussen
Chief Investment Strategist, OptionsHouse

Here is how you do it.

On your position pane on the new OptionsHouse platform the symbol text is blue indicating an action menu on a mouse click.  Besides simply viewing a quote or selling the position from this menu you can also choose to execute a complex order (see menu below)

Say, for instance, you wanted to place an OCO (order cancels order) complex order on the existing Amgen 100 share stock position.  OCO orders are typically used to simultaneously place a target limit order above the market to harvest a profit as well as placing a Stop order below the current market price to limit further losses.*  When any part of either order receives an execution, the other order will be canceled immediately.

To begin, in the Positions Pane click the symbol description AMGN Stock to activate the action menu.

On the action menu  select:

Sell Advanced -> As OCO (Order Cancels Other)

An order ticket will populate with two order tabs labeled (A) Order 1 and (B) Order 2:

Order 1 is shown and as populated is designed to close the full position in your position pane – that is after all why we are creating the order from our open positions – with the default order price type and limit price relative to the current market which you are able to customize in the Manage Accounts tab.  In this case I adjusted my price up to the target price I would like to sell my stock ($95.00) and I will change my order duration to a GTC order as I want this order to continue to be active in the market every day until it either is filled or I cancel it.

To populate Order 2 with our downside Stop Loss order, simply return to the Position Pane and click the symbol description AMGN Stock once more, this time selecting Sell ‘AMGN’ Stock In (B) Order 2.

Once again a Limit order will be populated to your default settings.  I will change this Price Type to Stop and set my stop price below the current market at a point where a market order will be triggered if the stock trades at or below my stop price ($91.50).  This is designed to stop any further losses on the position.   I also change my Duration to GTC so I can set this OCO order and know that I basically have the price in AMGN surrounded.

I preview my trade ticket and I can see that I will do one of the two trades.  That is, I will either sell at my target exit level above the market ($95.00 in this case) or I will sell my shares with a Market order that will be triggered  at  a stop price set at 91.50.  Submit the order and your OCO complex order is in the market working.

Being able to construct complex orders directly from your positions in your Position Pane is another way OptionsHouse enables you to more quickly and efficiently execute your trade ideas.  Moving from trade idea to execution faster makes you a faster trader, and FAST MATTERS!

The fine print:  OCOs and other complex orders are named complex for a reason. Take your time previewing the order to ensure accuracy.  Make sure that any stop orders on a sell ticket are placed with stop prices below the current market price of the stock.  Make sure that the durations match.  Also, if two marketable orders are entered through an OCO order, you could be filled on both orders and you will be responsible for any losses which may occur.

*For full explanation of the risks and rewards of all types of Complex orders view the archived webinar for more information:

Trading Complex Orders on OptionsHouse

An alternative trade to consider may be replacing those winning stock positions with option positions in what is called the Stock Replacement Strategy.   Here is why.  While the market has been grinding higher these past months, the implied volatility of the options on many of these winning stocks has been plunging lower.  The VIX (CBOE Volatility Index) which is calculated from a weighted blend of prices for a range of options on the SPX cash index has fallen from 18.02% on December 31, 2012 to  under 11.3% today.  This indicates that the premiums charged for options have fallen by almost 40% in volatility terms.  What this means for you and me is the cost of replacing a long stock position with a long option position could be compelling.

Here is how the strategy works:

Just as the name implies, you “replace” your stock holding with a long in-the-money call option.  This replacement strategy may offer investors the opportunity to participate in further upside price movement in the underlying stock but with considerably less downside risk.

The downside risk of a long option is limited to 100% of the total premium you pay for it.  But remember nothing comes free in options trading – you need to be aware of the breakeven point with the purchase of the call.  This is the extra premium above the current price level of the stock which is the call option’s time premium.  With a long stock position, if the price is exactly unchanged in one month you would experience no profit or loss.  With  a long call position instead, if the stock does not advance beyond the breakeven point you will lose only the extra time premium that was present when you purchased the call option.  This time premium is also known as extrinsic premium and is shown on the OptionsHouse Option chain in the “Pro” format.  You can also calculate the premium by adding the premium paid for the option to the strike price of the option and subtracting the stock price.  The point to understand is that currently  the market is higher and the time premium is lower in many names than it has been in quite some time.

OptionsHouse provides a tool within the Trade Generator, which allows you to analyze Stock Replacement strategies.  The Trade Generator (Trade Gen) is found in the Tools Tab:

Within the Trade Gen pull down the menu to activate the Stock Replacement strategy:

Say, for example, you are long Goldman Sachs (GS $153.92).  If you are still bullish you may consider replacing your long stock with a call option.  Simply put in your target upside price, the timeframe you believe it will take to achieve your price target, and a downside stop point at which you might sell your stock if the price declines.

The stock replacement tool will produce potential option trades you may consider.  In this case it produced the Apr 150 Call which could be purchased for $6.85.

Comparing the two strategies using the target price and timeframes you selected, the target gain in long stock is $1,108 compared with making $815 with the call purchase.  But more importantly, the Return on Investment (ROI %) for the option trade is 120.6% compared with 14.5% for margined long stock.     Also, compare the loss amount at the Stop loss point you selected.  The stock position would lose $892 if you sold your stock with a $145 stop, or $685 (100% of the option price) if the option you purchase expires worthless.  This is a 24% reduction in downside.

Stock Replacement may be a strategy to consider as we are near all-time market highs with option premiums currently lower than they have been for some time.

Tuesday evening the VIX index closed at 12.31, the lowest level since early 2007.   In two short days since then this “fear gauge” is up almost 25%, 2.91 points to 15.22!  A more practical way to look at it is the actual premiums charged for straddles on the SPY Exchange Traded Fund.  On Tuesday, the March 153 at the money (ATM) straddle was quoted at a price of $3.34.  Today, the 151 strike is the ATM and March straddle closed at 4.12.  That is quite remarkable, 2 days less life in these 23 day straddles and the premium charged actually is higher by 78 cents!  Put one more way, the implied volatility of the 151 strike options on Tuesday was 10.4%, today the same implied vol is measured at 12.5%.

So what does this all mean?  I believe it really comes down to the most basic of economic theories, supply and demand.  The market rally this year has indeed been a grind.  The actual 10 day historical volatility of the S&P index has been grinding lower as the market grinded higher this year down to a level below 5%.  This essentially means the index was moving less than a third of a percent per day.  No wonder very few option traders were bidding on volatility (option premium).  The market moves were making a loser of owners of both the calls and the puts.  The VIX spiking the past two days shows that the demand side of the equation is back.  Demand for options as a hedge to protect against a price move.

Fear and Demand higher = Price of Options higher

As a volatility trader, I have seen many times people selling option premiums when they are low and buying them when they are high.  This is not necessarily a bad thing.  After years of volatility trading, I have found that buying options when the market is not moving has made it very hard to make money regardless of how “cheap” the  option premium appeared in implied volatility terms.  Using options as a hedge however has a different utility function.  When hedging a portfolio either by replacing a long stock position with a long in the money call, or perhaps buying a portfolio put or put spread using puts on the SPY ETF, the being able to purchase premium when it is on the low side is basically getting these hedges “on sale”.  Warren Buffett has been quoted as saying one of the keys to his success is to understand Fear and Greed in the markets.  He has gone on to say something to the effect of, …”try to be greedy when everyone is fearful and fearful when everyone is greedy..”  not an exact quote but you get the gist.

So, if you are like many investors, happy the market is up by 6% YTD with Friday’s recovery, but a bit nervous on the future prospects going forward, it may be time to consider using options to reduce exposure to downside risks.  For more info on how to take some chips off the table using options you can find those articles here.

Take Chips off the Table? Using the Stock Replacement Strategies

and

Take Chips off the Table? Using the Portfolio Put Strategy.

These levered ETFs provide double and triple daily returns (or inverse returns) on the underlying index on which they are based. Investors have flocked to these instruments to the tune of $40 billion in assets.  In my opinion, the majority of these assets are being used very incorrectly and to the detriment of the user.

The reason is these products are designed to replicate a multiple of the DAILY movement of the index.  The ETFs themselves use futures to achieve the desired geared changes.  Therefore, in order to provide double and triple the returns (positive and negative) on a daily basis, they are required to sell more futures on days the market is down and buy more futures when the market moves higher.

This process of chasing the market, buying high and selling low, causes a negative drift over time for the asset when the overall market is volatile.    The problem is, investors are holding these for multiple days and even months.

Over time, with the ups and downs in the market, these products are designed to underperform.  When looking at the pair of three-times levered ETFs on the financial sector over the past three months, many investors would expect if the bearish ETF (Direxion Daily Financial Bear 3x Shares – FAZ) were lower, the bullish ETF (Direxion Daily Financial Bull 3x Shares – FAS) would be higher.  Not the case.  FAZ is down over 20% and FAS is down over 30%!

Those investors who have held either of these ETFs have lost a significant percentage of their investment.

It is imperative for traders to remember these are designed to be intraday trading instruments, not a longer-term (or even shorter-term) hedge.  The problem is the market can gap lower on the open, making it tempting to hold the inverse Bear ETF overnight in your position as part of a hedged position.  Using put and put-spread strategies may be much more effective over time relative to owning a triple levered Bear ETF.

• The first rule to always remember is there is no “FREE MONEY” in option trading.  If something looks too good to be true, it probably is.  Look again, you are likely missing something.
• The second rule:  Dividend payment events do not have an instant positive monetary effect on a trader’s portfolio.  This is why the stock is referred to as trading ex-dividend (ex-div).  The ex-div date is the first day the stock is trading in the market without the buyer having rights to receiving the next dividend payment.  Because of this simple fact the share price normally drops by the amount of the dividend payment on the morning of the ex-div date.
• Last basic rule: Call Option holders are not entitled to ordinary dividend payments.  For dividend paying stock options, holders of In the money call options need to analyze the economic benefit of continuing to hold the call option vs. exercising (or selling) that call option prior to the ex-dividend date. This is to ensure that the purchase of the stock by exercise will settle prior to the dividend payment date which falls 2 business days after the ex-date.

Now a number of companies are announcing special dividends and moving their regular dividends to occur before the end of this year.

Marty Kearney from the CBOE (Chicago Board Options Exchange) highlighted two memos put out on the OCC website http://www.optionsclearing.com/

both which are very important for customers to understand.

OCC Infomemo # 31714.  Adjustment Policy for Accelerated Dividends. “… cash dividends which are paid pursuant to a company’s regular dividend payment program but which are subject to accelerated payment shall be deemed “ordinary” dividends.  Ordinary dividends do NOT occasion (strike price) adjustment.  This is irrespective of the company’s characterization of such dividends as “special”… ‘.

An example of this will be Best Buy (BBY).  They announced that the regular dividend originally scheduled for January 2, 2013 will be moved up to be paid on December 31, 2012.  Based on OCC Infomemo # 31714 – nothing happened to option strike prices on the ex-date.

The second memo deals with the more complex Special Dividend.

OCC infomemo # 30412. Changes to Cash Dividend Adjustment Policies. This is a six-page memo, the majority is Q & A.

(With) dividends paid outside of ordinary, The OCC will normally adjust (strikes) for non-ordinary dividends unless the amount is less than $12.50 ($0.125 X 100 shares). So if XYZ declares a Special Dividend of $0.10 per share ($10.00), nothing should happen to option strike prices.

Let’s look at a real example.  Costco (COST) closed Wednesday at $105.95.  They declared a Special Dividend of $7.00 per share, ex-dividend date 12/6/12, payable on December 18^th.  The January 105 strike put was trading near $1.60.  On the ex-date, the shares opened 7 dollars lower at $98.95.  Wouldn’t the 105 put be intrinsically worth $6.05?

NO.  In COST all the existing option strike prices were adjusted lower by 7 points.  So if you had bought the Jan 105 put Wednesday, it became the 98 strike put.  If COST is at $98.95 the newly adjusted 98 strike put was still $0.95 out-of-the-money.  Likewise the Jan 105 call at $0.72 was adjusted to 98 strike call.  To the untrained eye, it looks like there was an arb with a stock like COST and an OTM put.  There is no “free money”.

Be aware of the impact on your positions around all dividends but especially mindful of the special dividends we are now seeing.

1. A broad-based rally across the DJIA, S&P 500 and NDX indexes failed to occur in October and hasn’t happened since the mid-September quantitative easing rally.
2. It occurred without previous market leader Apple Inc. (AAPL  596.54 +1.22) leading the charge as its shares were up only fractionally from the previous day’s closing price.

To me this points out how the investment money flows could be diversifying themselves away from the previous market darling, Apple.  Besides a strong day in other sectors, financials, industrials, materials, energy, and technology all had strong sessions.  October’s earning season was less than stellar for technology overall, in no small part due to Apple’s shares falling from all-time highs valuing the company at 700 billion to under 600 dollars a share most recently.

Now while Apple appears to still be a wonderful company, the days of simply buying AAPL stock and watching it advance in price might be over.  Investors may consider a change to their strategy in trading Apple, by diversifying towards trading other stocks, or potentially doing both!

As the head of Risk here at OptionsHouse, the number one reason I have seen investors lose significant money is the result of their accounts being too heavily concentrated in one position or one stock.  Whether using a stock or option contract to gain exposure to a specific security, if you put all your eggs in one basket, this could be a recipe for disaster if something unexpected happens in that one stock you own.

The leverage which options offer presents the ability for investors to diversify across multiple stocks, sectors and even strategies.  Rather than buying their entire account value in Apple shares an investor could use stock replacement strategies by using options to gain long exposure at a fraction of the cost of stock ownership.  The risk to a long call is 100% of the premium paid upfront but that premium will be less than the cost of owning the shares which may allow you to spread your investment portfolio across multiple stocks in different sectors.

Investors can also use options to diversify across different strategies.  They can use bullish, bearish, non- directional, volatile, and neutral strategies depending on their investing outlook.  Perhaps an even better strategy might be diversifying across multiple strategies in addition to diversifying across simple stock selection.  On the OH platform the Trade Generator found on the Tools tab has a suite of useful tools which can assist you in diversifying across multiple strategies.

Once open, the Strategy Finder is the best place to start.

Users can filter by symbol, positions or watch list and pick their sentiment bullish, bearish, market neutral, or volatile. The Strategy Finder will find different strategies for consideration which would fulfill that investment thesis.

If you have more in depth questions, this tool is fully explained in our “How to” tutorials located on the home page www.optionshouse.com or with the inline help by clicking on the ? icon in the upper right corner.

The results from this or any tool should not be construed as a specific buy, sell or hold recommendation, but rather a starting point for your investigation. I do want to call to your attention the potential benefits of diversification and not having your entire account concentrated in one position or one directional bias.

Source: OptionsHouse Prodigio

So how can a trader remain in the market without getting shaken out when the market experiences those sudden turns?   Long stock traders may elect to utilize stop orders but run the risk of being stopped out just before the next leg up in a longer term rally.  The other notable risk associated with stop orders is GAP risk.  The stock price may gap through the stop level overnight, not providing the hedge to the downside.  However, options can provide a way to create a dynamic hedge.  Using call options and call spreads as a “replacement” for long stock positions can offer long exposure to the market, while giving the holder a dynamic stop loss price at a predetermined price point.  For investors already long stock in this market using call options is a way to maintain a long position but take some chips (risk and money) off the stock market table.

First the basics:

The risk to a long stock position is the share price may fall – theoretically could fall to zero so the entire purchase price is really at risk.  The risk to a long call position is 100% of the premium paid for the call if the share price is below the strike price at expiration.  This premium is usually a fraction of the full stock price.   This is why this strategy is also known in institutional trading circles as Cash  Replacement or Cash Extraction strategies.

Here’s how using stock replacement works in taking some “chips” off the table.  Using the option delta again is the key to determining the proper strategy.  Exactly the same as the prior two blog posts I wrote in this series on how to remove some risk from the market, the delta of the call will indicate the amount of risk you will have relative to a 100 delta long stock position.   Obviously, a long stock position experiences dollar for dollar profit or loss relative to the movement of itself.  A 70 delta call option however, theoretically moves in price at 70% of the movement of the underlying share price.  If the stock rises 1 dollar a 70 delta call option should increase in market value by 70 cents.  Remember, deltas and all the Greeks are theoretical measures.  The financial models from which they are derived assume that factors such as implied volatility of the options, interest rates and even time are all unchanged and all that actually changes is the underlying stock price when calculating Delta.   Likewise if the price of the underlying stock or ETF falls 1 dollar the 70 delta again implies that the market value of the call option will only fall 70 cents.  So quite simply replacing a long stock position with a 70 delta call will result in 70% of the risk associated with the ownership of stock.

Let’s look at a real life example to measure the costs and benefits of using this strategy.

Apple shares (AAPL) have risen appreciably this calendar year but since hitting $700 per share in mid-September have pulled back 10% to close the week at $630 dollars per share.  If you have a long position of 100 shares you have $63,000 invested in this position.   You could replace your long stock with a long in the money December 590 strike call option.

Source: OptionsHouse

It is a 71 delta option with a premium for 1 contract controlling 100 shares of 58.00 dollars.  Immediately this extracts the difference between what you take in by selling your long stock $63,000 – $5800 = $57,200 (Consult your tax advisor to understand any tax consequences).  However increasing the cash in your account is only one of the benefits of this strategy and not the point of this blog.  We want to pull some chips (risk) off the table and by buying this call we reduce our absolute risk to that of the premium paid $5800 from long stock of $63,000!  Immediately our risk profile will more closely represent that 71 delta we referred to.  Each dollar move in AAPL up or down we should theoretically make or lose about 70 cents.  Further the delta of this option is not static.  As the price of AAPL shares rises, the delta will increase toward 100 and subsequent price moves will mirror that of the stock.  Should the stock continue to fall, the delta will decrease toward zero – remember, you can’t lose more than 100% of the premium you paid no matter how low Apple stock price might fall.

These benefits are not free.  The $58 this option costs has additional time value or extrinsic value relative to the stock price.  The stock is trading $630, and the option has a strike price of $590.  630-590 is $40 of parity value.  The extra premium of $18 that this option cost is the extrinsic value.  The stock must appreciate $18, or 2.85% in order for this option to be profitable.   Turning this long call into a long call spread can achieve a number of things. It will reduce the amount the shares have to appreciate to become a profitable trade; it also takes some more chips off the risk table, though it will limit your potential gains.  Again nothing comes free in option trading.  For reducing the premium paid by selling a higher strike call you have to be willing to limit the upside profit potential of the trade.

Source: OptionsHouse

$700 per share was the recent top in Apple, so you could choose to sell this strike call and receive about $10.  This represents over 55% of the extra premium paid for the 590 call and would reduce the amount Apple needed to gain to $8 or 1.26% higher from here.  Selling this option will limit the maximum potential gain to the difference between the strikes less what you paid for it 110-48= 62.00 = $6200.  Or you could take a bigger slice out of the extrinsic premium by selling the 670 call at $17.75.  This almost covers all of the extra $18 in premium, but again it limits the potential max gain to 80-40.25 = $3975.  You have to look at these max gains vs. your max loss, the total amount of premium paid to get a true picture of return on risk.  The 590-700 call spread you are paying 4800 for a potential gain of 6200 = 129% potential gain.  The 590-670 call spread risks $4,025 to potentially make $3,975 a potential 98% return.  These are max losses compared to max gains; your actual return may likely be somewhere in the middle.

More importantly look at the delta to determine the best strike.  How many chips do you want to take off the table?  The 700 strike will reduce your exposure another 22% down to 49% (71-22 delta) and the 670 strike would reduce exposure another 34 deltas to only 37 delta (71-34) or 37% of the risk associated with long stock.

Again, this is not a buy, sell, or hold recommendation, but simply an example of how stock investors can use the stock replacement strategy to take some chips off the table on an individual position.  It allows you to remain with positive exposure to the market but in a more risk managed and hedged fashion.

Brokerage products and services offered through OptionsHouse, LLC.