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Legging in to Debit Spreads

The PowerTrend System has produced a lot of profitable call option trades over the years. When you have a profitable call option trade should you hold the trade for further upside profit potential . . . or do you take profits in case the stock declines in price with the possibility of a profitable option trade turning into a loss?

In this video learn how profitable trades by legging in to a spread trade to help protect profits and also increase the profit potential of the existing call purchase.

The Team will look at an actual option spread trade for the Health Care ETF symbol XLU. We purchased the XLU 42-Strike call @4.74. XLU moved up in price and we had a profit on our call option purchase. We then legged in to a spread trade by selling to open the XLU 48-Strike call @ 1.9. This created a bullish option spread. The Option Spread Analysis below displays the profit potential for our XLU spread trade.

This analysis reveals the profit potential for this option spread trade assuming various price changes for XLU at option expiration from a 7.5% increase in price to a 7.5% decrease in price.

The analysis reveals that if XLU decreases 2.5%, remains flat or increases in price at all at option expiration, we will realize a $316 profit and a 111.3% return (circled). A 5% decline for XLU would result in a 104.4% return and a 7.5% decline would result in 60.1% return. A 60.1% return when the underlying stock is down 7.5% is a great strategy for navigating volatile or non-trending markets and can increase your percentage of winning option trades.