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Investor Buys Call Spread in UAL

An investor purchased a latter-day call spread in the stock on a moderately bullish move.
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shares have gained 2% so far on the day, which is good news for at least one investor who bought a later-dated call spread on a moderately bullish bet.

Around 12:19 p.m. EST, the investor bought 6,000 Sept. 15-22.5 call spreads for a net debit of $2.35 per spread. The investor sold the Sept. 22.5 calls at 95 cents per contract and simultaneous bought the 15-strike calls for $3.30 per contract.

This cost means that the investor needs UAUA shares to close higher than $17.35 (the breakeven price) at September options expiration to make money, unless the call spread appreciates with the shares prior to expiration and the investor decides to sell the spread back out.

Investors make a maximum profit of $5.15 (the difference between the strike prices minus the premium paid) if UAUA shares climb to $22.50 or higher. But the call spread protects the investors from unlimited risk if the stock drops below $15, in which case the maximum loss is $2.35 (premium paid).

UAUA shares are currently trading up 29 cents to $15.27. Implied volatility of the Sept. 15 calls is 70%, while the 22.5-strike calls have an implied volatility of 62. This compares to a 30-day historical volatility of 74.

The airline company's stock reached a recent high of $15.95 on Feb. 12. It's interesting that at least one investor could be calling for at least 44% of upside throughout the next seven months, but making the bet less expensive, and risky, by simultaneously selling calls.

-- Written by Jud Pyle in Chicago

At the time of publication, Pyle did not have a position in the stock mentioned. Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."