Bullish Call Spread Trade on AAPL

Like the rest of the equities market, shares of Apple Inc. (NASDAQ: AAPL ) were
swimming in red ink last week. Nevertheless, looking at the action in the
options pits, it appears one spread strategist like most of Wall Street was
maintaining an optimistic outlook on the tech behemoth. Specifically, in
Friday's session, symmetrical blocks of calls traded at the January 2012 380
and 400 strikes. Implied volatility (IV) on the 380-strike call was last seen
2.8 percentage points higher, while IV on the deeper-out-of-the-money call was
up 2.5 percentage points at last check, pointing to the initiation of new
positions at the strikes. However, while the 380-strike calls traded at the ask
price of $29.37, implying they were likely bought, the 400-strike calls crossed
at the bid price of $20.77, hinting at sell-to-open activity. Simply put, it
appears the speculator constructed a long-term bull call spread on AAPL for a
net debit of $8.60 per pair of calls ($29.37-$20.77). By doing so, the investor
is betting on shares of AAPL to power north of the $388.60 level (bought call
strike plus net debit) within the calls' relatively lengthy lifetime. However,
no matter how far the security should climb beyond the $400 level before options
expiration, the most the trader can make is capped at $11.40 per pair of calls
(difference between strikes minus net debit) thanks to the sold 400-strike
calls. On the flip side, even if AAPL extends last Friday's retreat, the most
the investor stands to lose is limited to the $8.60 paid to establish the
spread. But if the strategist has bullish expectations for AAPL, why not just
buy the 380-strike calls? After all, had the trader simply purchased the
380-strike calls, their profit potential would be theoretically unlimited, as
there's no limit to how high a stock can rally. In the simplest terms, while a
long call can offer an appealing profit potential, the vanilla call buyer
would've needed AAPL to muscle atop the $409.37 level (strike plus premium
paid) just to break even. Plus, they would've been out the entire $29.37 paid
for the call had the stock failed to live up to the lofty expectations. By
simultaneously selling the higher-strike call, the strategist not only slashed
their breakeven rail, but also reduced the maximum risk (and initial cost) by
nearly 71%. At last check, shares of AAPL have surrendered more than 4% to
linger in the $356 vicinity. In order to rebound and extend its quest for record
highs as per the strategist's expectations the stock will have to power atop
both its ten- and 20-day moving averages, which haven't been toppled since
August 1. As alluded to earlier, though, the options bull isn't the only
member of AAPL's fan club. According to Zacks, the security has earned 37
strong buys and four buy ratings from analysts, compared to three lukewarm holds
and not a single sell suggestion. Plus, only about 1.3% of the stock's float
is dedicated to short interest, and it would take less than a day to buy back at
AAPL's average pace of trading. This article originally appeared on
MoneyShow.com .