Bull Calendar Spread

The Bull Calendar Spread: How To Use This Trading Strategy To Bag 133% Now Or 4,900% Later
By Karim Rahemtulla, Options Expert
Friday, December 7, 2007: Issue #479

Every time I turn on the television and hear some buffoon boldly (and irresponsibly) proclaiming that there’s no way you can make money in this oh-so terrible market, I don’t know whether to just laugh at him, or toss something at the set.

It’s flat out wrong.

As members of my LEAPS investment service found out on Monday, they had an enviable choice to make: Either walk away with triple-digit profits now, or shoot for the moon and go for quadruple-digit profits later using a bull calendar spread – both strategies with little to no risk.

That’s what I call a tough decision – but one that any investor would love to have. And they had it in a market where you supposedly can’t make money. Now, I’m going to show you how to do the same thing…

LEAP Options: Triple-Digit Door #1

On October 8, I instructed my subscribers to buy January 2010 $5 LEAP option calls in Company X for $1.05 (I can’t reveal the name of the company here, out of loyalty to my paying customers because the quadruple-digit part of the play is still active).

The beauty of this play is this: The company had disappointed investors too many times recently, so hardly anybody was paying attention to the recovery story going on at the time. But savvier investors willing to dig a little deeper would have seen company insiders starting to load up on shares a few weeks ago.

Despite this positive activity, shares actually declined. But about a month ago, the company released earnings that revealed the turnaround in progress. Voila! In the four weeks that followed, shares shot up 40%. Yet another example that insider-buying activity is a great indicator of a company’s prospects. After all, who knows a company better than its insiders? Certainly not demanding analysts and the fickle masses on Wall Street.

But the best part is that our options rocketed up 133% over the same four-week period. So a little under two months after we entered the position, subscribers had the chance to bag that profit last Monday and have no more involvement in the play.

But those who wanted the chance to make even more could dive through Door #2, with the potential to make quadruple-digit gains – with just a measly nickel at risk. Here’s how it works…

Feeling Bullish? Then Go For A Bull Calendar Spread

Sticking with the same company, I recommended a Bull Calendar Spread.

This is a little different from a conventional bull spread, where you’d sell an option with a higher strike price and the same expiration date against your existing option (in this case, the January 2010 $5 calls).

With a regular bull spread, our cost would be reduced by the amount we receive from the sale of the option, and the upside would be limited to the spread between the two strike prices. Here’s an example of a conventional bull spread:

Let’s say you buy Option A – the January 2008 $5 calls for $1.

Against this position, you sell Option B – the January 2008 $7.50 calls. That means the spread is $2.50 ($7.50 minus $5).

For selling Option B, you receive a $0.50 premium. So your net cost is $0.50 ($1 minus $0.50).

Your upside is limited to the spread. So you’re risking $0.50 to make $2.50. Your downside is $0.50 – you cannot lose any more than that.

Bull Calendar Spread: Quadruple-Digit Door #2

In this case, though, we executed a bull spread with a twist – the Bull Calendar Spread – giving us a shot at those quadruple-digit gains. Those who chose not to sell the January 2010 $5 call options for 133% profits did the following:

Having paid $1.05 for them, the price had climbed to $2.45 – $1.40 in gains (133%) – we could now look at higher strike prices to see what the premiums looked like.

Instead of looking at the January 2010 $7.50 calls, I looked at the January 2009 $7.50 calls. Lo and behold, they were trading for $1 on the bid. So we sold that option, effectively reducing our net cost to $0.05 (remember, we paid $1.05 for the January 2010 $5 calls) to make the spread of $2.50 ($7.50 minus $5).

Bottom line: If the underlying shares of Company A close at $7.50 or higher in January 2009, we stand to pocket a few thousand percent. I’m pretty confident that we will. And our risk? A nickel.

Here’s the sweetest part: If the shares don’t close over $7.50 at expiration, but over $5, we will still be hugely profitable, since our cost now is just 5 cents.

And remember, we still have until January 2010 on our initial option. If we sold another option against that, our cost would actually be negative – meaning that we’ll actually be getting paid to make that trade. How do you like them apples, Wall Street!

So it was a simple – and great – choice for my LEAPS Trader subscribers to make. Make 133% now? Make up to 4,900% next year?

Who says there are no free rides on Wall Street?

Karim Rahemtulla