Profit from a New S&P High with This Option Trade

11/10/2009 12:01 am EST

Focus: OPTIONS

Think the S&P 100 Index (OEX) could move 10% higher by February? Be sure to read Corey Rosenbloom’s Trading Idea for today. Here’s a way to profit from that move.

This bull call spread offers a potential return on risk of 460% if the index breaks above 550 in the next three months.

Investors choosing to trade this strategy don’t need the OEX to go all the way to 560 to capture significant profits in this spread since its value will increase considerably as the market rallies toward levels not seen since the financial crisis accelerated in September 2008.

OEX Debit Spread Trade Detail

The OEX is currently trading at 502.40 at the time of this article.

Debit Spread/Bull Call Spread

  • Buy the February 540 call (out-of-the-money) for $5.80 per contract
  • Sell the February 560 call (out-of-the-money) for $2.25 per contract
  • Net debit of $3.55 (or $355 per spread)

Profit/Loss Details

Maximum Risk: $3.55 (the debit paid at the time of the trade) plus commissions.

Maximum Potential Profit: $16.45 (the difference between strike prices—20—minus the debit of $3.55). Return on risk is approximately 463%.

Break Even: 543.55 (the strike price of the purchased call plus the debit paid).

Remember, trading Ideas are shown as a starting point for people to begin their own research. Trading ideas are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions, but we hope that some of these ideas will give you a starting point as you look for strategies to employ.

By the Staff at ONN.tv

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