Good Example of Long-Term Bullish Spread

04/13/2010 12:01 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Can Amgen, Inc. (Nasdaq: AMGN) tackle stubborn resistance at the $65 level during the long term? One speculator seems to think so, since the drug company was the target of a massive call spread earlier yesterday. The optimistic option player selected the stock's January 2012 series for a bullishly biased option strategy, giving the trade plenty of time to play out.

AMGN price chartShortly after 1 pm, a block of 10,000 calls traded on AMGN's January 2012 50-strike call near the ask price at $15.55, indicating they were purchased. At the same time, a matching block of 10,000 contracts changed hands on the biotech issue's January 2012 70-strike call at the bid price of $5.10, suggesting they were sold. Both blocks were marked "spread," and volume is well outpacing open interest at both strikes, indicating that these are all newly opened call positions.

In other words, this appears to be a bullish debit spread on AMGN. By purchasing the January 50 calls, the trader is looking to capitalize on a long-term climb in the shares' price. Meanwhile, by simultaneously selling the January 70 calls, the trader has effectively reduced his cost of entry and breakeven point on the spread. However, as a tradeoff, he's also limited his profit potential. The maximum possible gain is now limited to the difference between the two strikes, less the initial net debit of $10.45 per pair of contracts.

Currently, AMGN is trading squarely between these two strikes, near $60 per share. The security is resting comfortably above the short-term support of its ten- and 20-day moving averages, although the $61 level has capped the equity's progress since April 1.

Click to Enlarge

Beyond that, additional layers of resistance are looming large. The $65 level hasn't been bested on a monthly closing basis since January 2007, and AMGN hasn't traded above $70 for more than three years. However, today's debit spread speculator isn't too overly ambitious since he penciled in about 21 months for the equity to conquer these technical roadblocks.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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