The following post is a Guest Blog by CNBC Contributor Brian Stutland.
On Thursday, Delta Air Lines gaped up to trade at its highest level since 2011, before finishing the day up 1.5 percent but off of its highs. The stock saw heavy call trading, and 5.3 calls were traded for every put.
The biggest trade of the day was the purchase of 6,000 June 13-strike calls, and sale of 6,000 June 15-strike calls, for a net debit of $0.88. This was done with the stock at $13.52, and this trade has a break-even price of $13.82 at June expiration. Therefore, it is a bullish bet that the stock's rally continues. (Read More: Call Options Explained.)
Delta's big move was due to a big analyst upgrade—Goldman Sachs upped the stock from "sell" to "buy" on the company's cost-cutting efforts and rebounding international credit.
Goldman's price target is $15.90, but this trader structured this trade with a target of $15 in mind. How can we tell?
Well, by selling the 15-strike call, the trader was able to partially subsidize the purchase of the 13-strike call. This means a lower outlay of cash for the position and therefore lower risk to the trade. However, selling this call also means that the trader only gets to participate in the upside between $13 and $15. At $15, the trader's profits are capped.
Delta is already up 12 percent year-to-date, and nearly 50 percent since November. After such a big run, especially in the last two weeks, it seems that Delta is due for a pullback or period of consolidation. That is why, if you are looking for long exposure to the stock, it is important to do so with as little downside risk exposure as possible.
This bull call spread will make $1.12 if DAL is above $15 at expiration, and it risks $0.88 for the chance at this gain. I would look for reward-risk multiples above 1, and I would look to trade a call spreads after a pull back.
With the stock hitting resistance yesterday, and the S&P 500 running into resistance as well, a pause in the rally could be coming soon. Personally, I'm hoping for a better entry point before I add exposure to any equity.