Vertex Pharmaceuticals was added to the IBD SwingTrader portfolio on Friday after finding support at the 50-day moving average. VRTX stock is currently No. 1 in IBD's biotech industry group.
The company last week announced earnings of $3.60 per share, which beat expectations of $3.47 and was well above the 17 cents a share from a year earlier.
Vertex Pharmaceuticals is showing is showing green check marks across the board, and today we will look at a bullish option strategy called a bull call spread.
A bull call spread is created through buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to October expiration, a 300-strike call option was trading around $10.75 on Friday. The 310 call was around $7.70.
Trade Offers $695 Return on VRTX Stock
Buying the 300 call and selling the 310 call would create a bull call spread. The trade cost would be $305 (the difference in the option prices multiplied by 100). The maximum potential profit would be $695 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if VRTX stock closes below 300 on Oct. 21, the most the trade could lose is the roughly $305 premium paid.
Potential gains are also capped above 310, so no matter how high VRTX stock might go, the most the trade could profit is $695.
In terms of trade management, if the stock dropped below 272, I would consider closing early for a loss.
According to the IBD Stock Checkup, VRTX stock is ranked No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 96.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
