Larry’s Note: I’ve weathered – and profited from – every crazy thing the markets have served up for a long, long time. But doing so has required looking in some unexpected places…

Throughout my entire Wall Street career, I made over $500 BILLION worth of trades in one little-known (but massive) market.

Now I’m sharing some of my best strategies that can help you find opportunities “hidden in plain sight.” I’ll help you get in position for what’s coming next – as the U.S. deals with its huge pile of debt, interest rate debates, geopolitical uncertainty… and more.

To find out all the details, simply go right here for a quick explanation of this strategy.

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If you think a stock is going to rally, then you can buy a call option.

A call option gives you exposure to an up move for just a fraction of the cost of buying shares. Plus, your maximum risk is clearly defined – the premium you paid for the option.

But there’s a catch…

Because options expire, the clock is always ticking. If the move you were hoping for doesn’t pan out within your time frame, you run the risk of your option expiring worthless.

When buying a call option, you also have a higher breakeven compared to buying stocks. That’s because you need to recoup the cost of the option.

But the strategy we’re going to look at today can help stack the odds in your favor…

Adding Another Leg

The strategy I’m referring to is a “bull call spread.”

With this strategy, you buy a call option – and you also sell another call option at a higher strike price.

You need to use the same expiration date and place both legs of the trade simultaneously.

The premium you receive from selling the higher strike option partially offsets the cost of buying the lower strike option.

So by adding this extra leg, you lower your breakeven and give your trade a higher chance of success.

To see how a bull call spread works, let’s check out an example with the SPDR Gold Shares ETF (GLD). (Please note that this is just an example, not a trade recommendation.)

SPDR Gold Shares ETF (GLD)

Source: e-Signal

GLD has peppered the $315 level for the last few months. Now you believe it’s going to finally break through that level. And you want to take part in that move.

You can buy a $315 call option for $4.60 (or $460 per option contract – an option contract is for 100 shares).

If you just bought this call option, your breakeven on your trade is $319.60. That’s the option’s strike price ($315) plus the option premium ($4.60). So GLD has to trade above $319.60 before you make a profit.

But maybe you’re uncertain about the size of the rally. You’re confident the breakout will occur… but not how much the stock will move.

And this is where the second leg of the bull call spread comes into the picture…

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Working the Numbers

In addition to buying the $315 call option for $4.60, you sell a $325 call option. For this, you receive $1.70 (or $170 per contract).

The total cost of the spread is $4.60 minus $1.70, which equals $2.90 (or $290 per contract). That lowers your breakeven on your trade to $317.90.

That’s the strike price of your bought call option ($315) plus the cost of the spread ($2.90). So now, GLD only has to trade above $317.90 before you profit.

Of course, while the spread lowers the cost of your trade, it comes with a catch. You’ve capped your profit potential.

The maximum profit you can make is the difference between your options’ strike prices ($315 and $325 = $10), minus the total cost of the spread ($2.90). That equals a max profit of $7.10, or $710 per contract.

So a bull call spread is a trade-off…

By placing the bull call spread, you gain exposure to an up move. But you’re giving up the potential for larger profits if the stock price rallies a lot more than you anticipated.

That said, the spread reduces the cost of the trade and lowers your breakeven. That makes it more likely your trade will turn a profit if the stock rallies.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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