Spreads

Legging In

AKA a modified debit spread/ghetto spread

This is like a debit spread BUT you DO NOT buy or sell legs at the same time. You enter your second leg after the price of the underlying stock has moved into the direction you are playing. The benefit of this method is that you can ride contracts risk free provided the underlying stock moves in your favor. The downside is that you cap your gains.

Example:

We will use PLTR in this example.

1. You buy 1x 1/15/21 PLTR $40 strike call at $2.10. Your cost for that one $40 strike contract is $210.

2. Wait for PLTR to go up and for your above call to get more expensive. You will then want to sell an OTM call that covers the cost of the contract.

3. You sell 1x PLTR $50 call at 2.60. You now have a credit of $260.

4. Between the buy and sell you now have a profit of $50 and you are riding your $40 strike PLTR call for free.

FAQ:

Q: But what if the sold call goes ITM and is exercised?

A: Your broker would use the long PLTR option you bought to cover the call you sold.

Q: Is this the same as selling naked calls?

A: No, this is not the same as selling a naked call as the lower strike essentially protects you against the higher one you sold.