Sometimes, the best ideas are so simple. One of the great advantages of using options is their flexibility-that is if you know how to use them. Consider the well known and expensive stocks and their expensive options. Sometimes a trader passes on a good opportunity because the cost of the option premiums seem too expensive. But there is a way to reduce the costs of expensive stock options to allow the option trader to take advantage of opportunities- even with high priced options.

Suppose an option trader believes that Slumberger (SLB) is going to make a move up in the next few months. The trader would like to purchase the call option, but the premiums for the strike price and expiration months are expensive. The trader believes the trade to have a high probability of success but the capital required exceeds the option trader's money management parameters. Most option traders would pass on the trade but there is an easy way to reduce the premium costs......take a bull spread position.

A bull spread position is when a call option is purchased and another call option is written for the same expiration month but at different strike prices. The purchased call is made for the option contract with the lower strike price and the written call for the higher strike price. Immediately, the premium for the written call offsets a portion of the total costs for the spread position.

Let's look at an example: SLB is currently trading at $96.15. The option trader pulls up the option chain and sees that a call option at the desired strike price and time period is currently asking $ 27.30 per share for a total of $2730 for the call. To help offset the costs, the trader writes a naked call for a higher strike in the same expiry month for a price of 7.30 per share for a total premium of $730. Net total cost for the two options are: $2730-$730= $2000. Because the "real option strike price" we want is the lower one, we make sure that we are out of the written call (higher strike price) before it can go into-the-money. In affect by writing a covered call, our price for the purchased call (lower strike price) is reduced. The bad news is the upside is limited by the strike price for the written call. Maximum loss exposure on the spread is $2000 versus the original $2730 if the trader had purchased only the one call contract. In the real world, most spreads are closed out before expiration to ward off the effects of the time decay of the option as it approaches expiration.

As Karim Rahemtulla said in his column at (smartprofitsreport.com), executing a spread is easy and profitable.

To learn more about options, take advantage of Options University to give you the education on everything you need to know about options-from basic to master.