Owning calls locks in the price where an investor has a right to buy a stock, while selling them obligates him or her to sell shares if they go above a certain level. In the case of yesterday’s bullish call spread, the trader has the right to buy International Paper for $38, but must the stock for $42 if it goes that high by mid-January.
This spread cost $1.12 to open, which would translate into a profit of 257 percent if the paper company closes at or above $42 at expiration. That’s less than 20 percent above yesterday’s $36.16 closing price, which shows the kind of leverage that can be generated with options.
Investors have already been making money in the name after paying just $0.80 for the October 35 calls in mid-September. Those premiums more than tripled to $2.39 by later in the month.
Overall option volume was quadruple the daily average, with this trade accounting for most of the activity. Calls outnumbered puts by a bullish 9-to-1 ratio, according to our data systems.
—By CNBC Contributor David Russell
Additional News: Stocks May Be Headed for Rude Shock This Month
Additional Views: Bulls Log on to Yelp: Russell
Options Trading School:
David Russell is a reporter and writer for OptionMonster. Russell has no positions in IP.