This Trade recommendation for Commonwealth Bank of Australian (ASX:CBA) +47.23% gross Profit in 28 days using a Bear Call Spread Option Strategy
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We entered a Bear Call spread on CBA on 27th Aug, selling into strength, as we expected to see CBA underperforming against the other major banks. This outlook was formed due to the stocks strong performance over the prior months, and also due to CBA having released its dividend in mid Aug. This meant that dividend hungry investors were more likely to rotate out of CBA and into the other banks prior to ANZ, NAB and WBC paying their dividends in November.
The trade was initially established by selling the closest strike Calls above the stock price at the time, which were the Sept $73.00 Calls. To create a limited risk income strategy, we simultaneously bought the Sept $75.00 Calls, establishing a $2.00 Bear Call Spread. We received 82.5c credit on entry. The outlook for this trade was for CBA to trade sideways to lower throughout Sept.
Fast forward 4 weeks, and short-term weakness allowed CBA to dip under $73 with 2 days remaining to expiration. As this is a limited risk, limited reward strategy that becomes more sensitive in the final days before expiration, we took the opportunity to Buy Back the Bear Call spread for 27c, locking in a 55.5c gross gain on the position, equating to a yield of 47.2% on capital required to participate in this trade. This result was achieved despite CBA’s share price being only 0.60% lower than the stock price when we entered the trade 4 weeks prior.