Fri Sep 7, 2007: Six-Week LEND Call Spreads 35% Income

With six weeks left before October stock options expire on Friday October 19th, writing call spreads on Accredited Home Lenders Holding Co.(NASDAQ-LEND,10.14) stock offers a potential income of 35%.

Chart of LEND Stock

The table below lists call option spreads in order of furthest distance out of the money, to help call option spread writers select spreads that offer a high return with a high likelihood that the spread will expire worthless.

The spread in this example is currently 23.3% out of the money, yet still offers the potential of 35% income for just six weeks.

Selling the October 12.50 call and buying the October 15 call at current prices provides a net credit of $65 per spread on a margin requirement of ($250 - $65 = $185).

Dividing the income by the margin deposit: 65 / 185 = 35.1% ignoring commission costs. This is the profit assuming LEND stock closes below 12.50 on October 19th so that both call options expire worthless.

If LEND finishes above 15 on expiration day this bearish strategy will lose money. Owning the October 15 call will limit the maximum loss to $185 per spread.

Until next time, best of luck with your option investments!