Old Economy Stocks With Option Upside

A bull call spread is an options strategy that a trader uses when they believe the price of an underlying stock will move higher in the short term.

To execute the strategy, a trader would buy a call option and sell a further out-of-the-money call option with the following conditions:

• Both call options must use the same underlying stock
• Both call options must have the same expiration
• Both call options must have the same number of options

Since the strike price of the sold call is higher than the strike price of the bought call, the initial position will be a net debit.

The bull call spread profits as the price of the underlying stock increases, similar to a regular long call.

The difference between a bull call spread and a regular long call is that the upside potential is capped by the short call.

The purpose of the short call is to mitigate some of the overall costs of the strategy at the expense of putting a ceiling on the profits.

Losses are also capped, in this case by the debit taken when you execute the trade.

Let’s take a look at Barchart’s Bull Call Spread Screener for May 3rd:

As you can see, the scanner shows some interesting Iron Condor trades on stocks such as IPOF, AMC, BP, CCL and IBM. 

Let’s adjust the scanner to make sure we are only looking for bull call spreads on stock with a Buy rating and Mark Cap above 40 billion.

This scan gives us the following results:

BP Bull Call Spread Example

Let’s take a look at the fourth line item – a bull call spread on BP. 

This bull call spread trade involves buying the July expiry 32 strike call and selling the 40 strike call.

Buying this spread costs around $1.41 or $141 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:

8 – 1.41 x 100 = $659.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 467.38%.

The probability of the trade being successful is 33.4%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.

The spread will achieve the maximum profit if BP closes above 40 on July 15. The maximum loss will occur if BP closes below 32 on July 15, which would see the trader lose the $141 premium on the trade. 

The breakeven point for the Bull Call Spread is 33.41 which is calculated as 32 plus the $1.41 option premium per contract.

The Barchart Technical Opinion rating is an 80% Buy with an average short term outlook on maintaining the current direction.

BP had a huge day today closing 8.04% higher.

BP is showing an IV Percentile of 82% and an IV Rank of 41%. The current level of implied volatility is 36.64% compared to a 52-week high of 52.78% and a low of 25.50%.

IBM Bull Call Spread Example

Let’s look at another example, this time using International Business Machines (IBM)

This bull call spread also uses the July expiry and involves buying the 135 strike call and selling the 150 strike call.

This trade would cost $353 and have a maximum potential profit of $1,147.

The Barchart Technical Opinion rating is an 24% Buy with a weakenthening short term outlook on maintaining the current direction.

IBM is showing an IV Percentile of 58% and an IV Rank of 32%. The current level of implied volatility is 24.63% compared to a 52-week high of 44.53% and a low of 15.21%.

Mitigating Risk

Thankfully, bull call spreads are risk defined trades, so they have some build in risk management. The most the BP example can lose is $141 while the IBM call spread has risk of $353.

For each trade consider setting a stop loss of 25-30% of the max loss.

Also keep an eye on key support levels and moving averages.

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, May 3, 2022.