US Airways (LCC) adds 2 cents to $10.09 and a Dec 12 – 15 call spread trades on the airliner for 57 cents, 9000X on ISE. A customer bought the spread, to open, according to ISEE data. LCC hit a 52-week high of $14.51 one month ago today, but is down 30.5 percent since that time. Today’s spread trader seems to be betting that the stock will recover the lost altitude in the months ahead. Note that DAL also saw a bullish spread in its December options. Let’s take a closer look at the LCC spread and open it as a new Case Study. And let’s also close our CLWR Long Call Case Study.
In a bull call spread, the strategist is buying a call and selling a higher strike call. Writing the higher strike call reduces the cost of the trade and will hedge some of the risk associated with time decay. The trade-off is that, if the underlying moves beyond the higher strike call, there is limited upside because if the higher strike call option is in-the-money at expiration, assignment comes into play and the position has reached its max profitability. The best gain from a call spread is the difference between the two strikes minus the debit. The max risk is the debit paid. The breakeven at expiration is equal to the lower strike plus the debit.
In this case, shares are trading for $10.09 and LCC Dec 12 – 15 call spread traded for0.57. The risk to the trade is the debit paid, or0.57 if shares hold above the higher strike or about 19 percent above current levels. The breakeven is equal to the lower strike price plus the net debit, or 12.57 and 24.6 percent from current levels. The max profits happen if shares rally above the higher strike and equal the diff in the strike prices minus the debit, or 2.43. The OptionsXpress payoff chart shows the risk-rewards and probabilities of success graphically.
Case Study – LCC Dec 12 – 15 call spread
Bias = BullishRisk = Debit=0.57
Reward = Diff in strikes – debit =2.43
Download PDF—> LCC081312
Quick pop today. let’s close and make room for another trade.
Close – 08/20/2012
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.