Buying those 3 calls locks in a $3 entry price on the stock for the next 1 1/2 years, while selling the 5 calls locks in a sale price of $5 over the same period. The trader paid $0.43 to own that spread, which would translate into a profit of 360 percent on a move back to $5.
Sprint shares rose 0.74 percent yesterday to close at $2.74. The stock would have to almost double for that bullish call spread to reach its maximum value, but given how much more the trade could make on a percentage basis, one can see the kind of leverage that options can provide.
The drawback of the strategy is that if the debt-laden wireless company fails to rally, the entire position will expire worthless.
Total option volume in Sprint was 15 times greater than average yesterday, with calls outnumbering puts by a bullish 41-to-1 ratio.
Additional News: Sprint to Offer Pay-As-You-Go iPhone
Additional Views: Trade of the Day—‘Sprint’-ing Toward a Rebound?
Options Trading School:
David Russell is a reporter and writer for OptionMonster. Russell has no positions in Sprint.