Albemarle broke out to a new high on Friday and is currently the No. 1 ranked stock in the Chemicals-Specialty industry group.
The company last month announced earnings of $3.45 per share, which beat expectations of $3.03 and was up from $2.38 in Q1.
Albemarle is showing is showing mostly green check marks on its IBD Stock Checkup, and today we will look at a bullish option trading 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 the December expiration, a 310-strike call option was trading around $27.25 on Friday, and the 320 call was around $23.35.
Buying the 310 call and selling the 320 call would create a bull call spread. The trade cost would be $390 (the difference in the option prices multiplied by 100), and the maximum potential profit would be $610 (difference in strike prices, multiplied by 100 less the premium paid).
Risk Limited For This Options Trade
A bull call spread is a risk-defined option trading strategy, so if ALB stock closes below 310 on Dec. 16, the most the trade could lose is the roughly $390 premium paid.
Potential gains are also capped above 320, so no matter how high Albemarle stock might go, the most the trade could profit is $610.
In terms of trade management, if the stock dropped below 280, I would consider closing early for a loss.
According to the IBD Stock Checkup, Albemarle is ranked No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 89 and a Relative Strength Rating of 96.
Please remember that options trading is 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
