The Leader Is Back! How Should We Approach Options Strategies Now?

The leader of American retail investors, Roaring Kitty, is back with a post! He shared an image inspired by the cover of Time magazine, featuring a blank computer screen resembling a YouTube media player. This seems to be a modified version of Time's December 25, 2006, cover, when "You" (the American public) was named Person of the Year.

Since the post didn’t include any explanatory text, day traders quickly began speculating. For example:

• Unity Software (ticker: U) surged by as much as 8.2% intraday before closing up 4.9%.

• Clear Secure (ticker: YOU) reversed its earlier 4.6% decline but ultimately fell 1.1%.

• As a classic meme stock, GameStop (ticker: GME) soared 14% at one point before giving up most gains, closing up 5.9%. Another popular meme stock from the same era, AMC Entertainment (ticker: AMC), had a similar trajectory, finishing up 5.9%.

Meanwhile, Bloomberg reported a complex multi-leg options trade on Clear Secure, where a trader:

1. Bought a $30/$40 call spread (May expiration).

2. Financed it by selling $20 puts (same expiration).

This transaction appeared more like a hedge than a directional bet but pushed Clear Secure's call trading volume and open interest to record highs.

What Is a Bull Call Spread?

A Bull Call Spread is an options strategy where an investor:

1. Buys a call option at a lower strike price.

2. Sells a call option at a higher strike price.

Both options have the same expiration date.

Compared to simply buying a call option, this strategy reduces net premium costs by earning credit from the sold call. This lowers the strategy’s breakeven point and improves its win probability. Essentially, it’s a low-cost bullish strategy.

Key Features:

• Maximum Profit: Achieved when the stock price equals or exceeds the higher strike price. Profit equals the difference between strike prices minus the net premium cost.

• Maximum Loss: Limited to the net premium cost (the cost of the bought call minus the income from the sold call).

• Risk/Reward Characteristics: Risk and reward are both capped. While the strategy’s maximum loss is predictable, the potential reward is also limited.

• Best Use Case: When investors expect a moderate price increase but not a significant surge.

GameStop Bull Call Spread Case Study

Current Stock Price: $29.50
Investor Expectation: GameStop will rise to $35 within a month.

Strategy Details:

1. Buy a $29 strike call for $350.

2. Sell a $35 strike call for $230.

• Net Initial Cost: $350 - $230 = $120

• Maximum Risk: $120 (initial cost).

• Maximum Profit: $480 (difference between strike prices minus initial cost).

• Breakeven Point: $29 + $1.20 = $30.20

Profit & Loss Analysis:

1. Stock Price ≤ $29 (below the lower strike price)

   • Both options expire worthless.

   • Loss = Initial cost = -$120.

2. $29 < Stock Price ≤ $35 (between the strike prices)

   • The bought call has intrinsic value, equal to Stock Price - $29.

   • The sold call has no intrinsic value.

   • Profit range: -$120 (at $29) to $480 (at $35).

3. Stock Price > $35 (above the higher strike price)

   • The bought call gains value, but the sold call offsets gains beyond $35.

   • Total profit = $35 - $29 - $1.20 × 100 = $480.

Strategy Summary

• Maximum Risk: $120 (initial investment).

• Maximum Profit: $480.

• Ideal Scenario: Stock price rises to $35 but doesn’t exceed it significantly.

• Advantages:

  • Defined risk with lower initial cost.

  • Captures moderate upside potential.

• Disadvantages:

  • No additional profit above the higher strike price ($35).