Deere reports on Wednesday before the bell, and while traders are bullish on the stock ahead of the report, they're not anticipating a monster gain.
Last month traders bought more than 10,000 calls at the December 120 strike price, according to Jon Najarian, Najarian Family Office co-founder and "Halftime Report" contributor. But they also sold more than 13,000 calls at the December 140 strike price, and more than 4,000 contracts at the 145 strike.
So while the options activity indicates a bullish view, the market doesn't expect the stock to far surpass $145. All of these calls expire at the end of December.
This could be part of a trading strategy to offset the cost of buying the more expensive in-the-money calls to execute a "call spread" – selling calls with a strike price above the stock's intrinsic value while simultaneously buying the in-the-money calls.
But this also limits the potential upside. In this case, the trader could have to hand over Deere at $140 or $145 if the stock price were to exceed these levels—should the buyer of the 140 or 145 calls exercise their right to purchase the stock. So the potential gains are capped.
Since an in-the-money call is essentially owning the stock, the stock option will move in tandem with the stock's performance. In this instance, the calls that were bought for $9.90 in mid-October were trading at $15.43 as of Thursday. In that same time frame, shares of Deere are up 5.24%.