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Trading Techniques - Placing A Closing Order

HAVING TROUBLE PRINTING?
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One of our readers asked for help with placing the closing order described in the narrative for each new position. Using the XLNX play as an example:

PLAY (conservative - bearish/credit spread):

BUY CALL MAY-35.00 XLQ-EG OI=18 ASK=$0.10
SELL CALL MAY-32.50 XLQ-EZ OI=667 BID=$0.30

INITIAL "NET-CREDIT" TARGET = $0.25-$0.30
POTENTIAL PROFIT (X 10 contracts) = $250
MARGIN REQUIREMENT (X 10 contracts) = $2250
RETURN ON INVESTMENT (max) = 11.1%
COST BASIS = $32.75

INITIAL EXIT STRATEGY:

Once the position is open, traders should place a (contingent) order to close the short ($32.50) call options if the stock moves above $32.25. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.


PLACING THE TRADE:

Below is a screen shot of the (initial) closing order using the OptionsXpress platform. The specifics of this "contingent" order are...

Buy to close - 10 contracts - XLQEZ - at MARKET - when the bid price of XLNX moves above $32.25 - good until cancelled.



Obviously, there are some inputs that should be modified, based on your personal preferences, as well as a few alternatives with regard to advanced orders. However, this is the basic data and format necessary for a (protective) closing order on the short option in a spread. The methods (and timing) for closing the long option are similar, but that transaction is generally not as critical unless the stock is very volatile in a short time period. We will continue to discuss the subject of exit/adjustment strategies in future narratives.

MCM Staff

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