A Good Example of a Vertical Call Spread

04/19/2010 10:39 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

UnitedHealth Group Inc. (UNH) options traders focused heavily on call options last week, with the May 30 strike attracting most of the attention. More than 34,000 calls traded on UNH on Thursday, more than doubling the stock's daily average. Furthermore, about 7,240 of those contracts changed hands at the stock's May 30 strike.

Drilling down on this activity, we find that open interest at the May 30 call jumped by more than 7,000 contracts on Thursday, indicating that practically all of the volume translated as fresh open interest. Also of note, UNH's May 31 call was also particularly active, adding some 4,000 contracts. Peak call open interest for May resides at the 31 strike, where 10,379 contracts are now open.

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Call volume at the May 31 strike retained its momentum Friday, with more than 640 contracts changing hands by mid-morning. The out-of-the-money May 33 call was also attracting attention, with more than 760 contracts changing hands.

Buried within this activity is what appears to be a vertical call spread on UNH. Specifically, 300 May 31 calls traded on the International Securities Exchange (ISE) for the ask price of $1.22 at about 9:35 am ET. At the same time, 300 May 33 calls crossed the tape on the ISE for the bid price of $0.48.

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The total premium paid for this bullish spread strategy arrives at $0.74, or $74 per contract. The trader can realize a maximum profit of $1.26, or $126 per contract, should UNH rally to $33 per share by the time May options expire.

By Joseph Hargett, contributor, Schaeffer’s Trading Floor Blog

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