In my last post, I discussed why it's better to use a long time frame when selling option spreads. In this point, I am going to show why I ignored that advice.
I sold a call spread on $TSRO today, selling this week's $185 for $3.47 and buying the $195 for $1.47, a $200 spread per option contract. As usual when selling the spread, a pretty bad risk/reward ratio, 5 to 1 against. If the stock goes to $195, I loss the entire amount. Dumb, maybe.
Well, that's why the call it risk. Yes, it's a potential loss, but a defined one, pretty much. Is $TSRO going to $195? It already jumped $20 today to $182 (it was $183 when I put the trade on.)
The positive is that it doesn't have much time to go up. The $20 jump today can be traced to a takeover rumor. We will see if it has legs. My play is that it doesn't and drops, or at least holds steady through Friday, two days away. If I get a drop tomorrow, I'll close it early.
Probably more to discuss on this, but I want to get this posted, and chances are no one will read it anyone.