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This position generates a 6% return on margin (36% annualized). The margin amount for a credit spread is calculated as the amount of the spread times the 100 shares an option contract represents ($62 minus $57 = $5, times 100 = $500). Your maximum risk is $470 per contract, calculated as the amount of the spread minus the spread value, times the 100 shares an options contract represents ($62 minus $57 = $5, minus 30 cents = $4.70, times 100 = $470). Making the Trade: Use a spread order to "sell to open" the iShares Russell 2000 Value Index June 62 Puts, and "buy to open" the iShares Russell 2000 Value Index June 57 Puts, for a spread credit of 30 cents or higher. A put credit spread is a bullish position in which you want the stock price to stay above the upper strike price of the spread. Use an auto-stop order to close this position if IWN trades below $62 prior to June options expiration. A credit spread involves writing (selling to open) an option and purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or 'leg,' of the spread trade that you sell will give you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade. In a credit spread trade, you collect more money on the leg you write than you spend on the leg you buy, so you are getting paid to enter the trade! For maximum profits, you want both options involved in the spread to expire out-of-the-money. But regardless of what happens to the options, the money you receive for opening the position is yours to keep. Ken Trester's InvestorPlace.com Recommendation: AU Optronics (AUO)Every week, we search the entire InvestorPlace.com newsletter universe to find the best option play that lowers your risk and increases your profit potential with a stock recommended by an InvestorPlace.com newsletter editor. This week's best play is listed below… Louis Navellier's Quantum Growth Report is bullish on AU Optronics (AUO). Writes Mr. Navellier, "AU Optronics is a leading manufacturer of flat-panel displays. The company makes thin-film transistor liquid-crystal display panels that provide a clear, sharp image that are used in laptop computers, cell phones, car navigation systems, digital still cameras and personal digital assistants." "Last Tuesday [May 6] AU Optronics reported better-than-expected earnings for the first quarter as strong demand for flat-screen TVs boosted its bottom line. The company earned $890 million, which was more than 40% higher than analysts' expectations and represented the company's second-highest quarterly earnings ever. Citigroup responded to the earnings report by raising its earnings forecast for this year by 39% and for next year by 17%. AU Optronics is a good buy." For an option play to take advantage of Mr. Navellier's outlook, we recommend that you open a call debit spread on AU Optronics. A debit spread is similar to buying an option, except you are using the simultaneous sale of another option to offset some of the cost. Call Debit Spread to Buy -- Specifically, you should buy the AUO Oct 20 Calls (AUOJD) and sell the AUO Oct 22.50 Calls (AUOJX). You can pay up to $1 ($100 per contract) to take this position. Here is the information you need to know to buy our AU Optronics Call debit spread: Underlying Stock: AU Optronics (AUO) Current Stock Price: $19.36 Trade Type: Call debit spread Options to Trade: The specific trades to make are in the table below...
The prices that you pay to buy and sell each leg of the trade aren't important, because you are entering the trade as a spread. As long as you initiate the overall trade for a maximum debit of $1 ($100), that's your maximum risk and the most you can lose per contract. This debit spread reduces the cost of buying the AUO Oct 20 Calls, which otherwise would cost $1.65, to $1 per contract. Selling the AUO Oct 22.50 Calls allows you to collect income to offset some of the cost of the buying the AUO Oct 20 Calls. Your maximum profit potential with this position is 110%. Maximum profits will be realized if the stock is trading above $22.50 during the week prior to October options expiration. Making the Trade: To enter this position, use a spread order to "buy to open" the AU Optronics Oct 20 Calls, and "sell to open" the AU Optronics Oct 22.50 Calls, with a debit price of $1 or less. Other Actions to TakeProfit Alert: Anadarko Petroleum (APC) Anadarko Petroleum (APC) has rallied strongly this week and the APC Aug 70-75 Call debit spread (APCHN/APCHO) closed Thursday with a 64% gain. Take profits on half of your position now. Let the rest ride for possible future gains. This position will reach maximum profits if APC is trading above $75 during the week prior to August options expiration. Profit Alert: Gilead Sciences (GILD) Gilead Sciences (GILD) has stayed strong during the bear market and the GILD Jan 42.50-47.50 Call debit spread (OJKAV/OJKAW) closed Thursday with a 54% gain. Take profits on half your position now. Let the rest ride for possible future gains. This position will reach maximum profits if GILD is trading above $47.50 during the week prior to January options expiration. Sell Alert: Synchronoss Technologies (SNCR) Close the Synchronoss Technologies (SNCR) Dec 25-30 Call debit spread (QQRLE/QQRLF). The stock got clobbered this week and the InvestorPlace.com recommending editor now rates the stock as a Sell. Sell Alert: PowerShares Golden Dragon China Portfolio (PGJ) Close the PowerShares Golden Dragon China Portfolio (PGJ) Sept 26-21 Put debit spread (PGJUZ/PGJUU). The stock has been trading above its stop price. Also, we know many of you can't attend the Las Vegas Money Show so we wanted to give you the opportunity to watch these important sessions in the comfort of your home or office. Sign up today by clicking on the links below and you can attend these sessions for free: Double Your Portfolio Value in the Bull Market of 2009 Tuesday, May 13, 11:30 a.m. - 12:15 p.m. Pacific What's the Next Mega Trend? Wednesday, May 14, 11:30 a.m. - 12:15 p.m. Pacific Yours for Maximum Profits,  Ken Trester and Jeff Carter |
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