The Spread Trader: Bull Call Spread On CBS Corp (CBS)

| September 10, 2012 | 0 Comments

Fall is here.  It’s a beautiful time of year here in Arizona.  The temperatures are falling and it’s once again tolerable to be outside… at least without a pool or some kind of air conditioning. 

But it’s also a great time of year to be a couch potato.  Especially, if you’re into sports or politics.

Right now, Major League Baseball season is winding down.  College and pro football seasons have kicked off.  PGA golfers are battling it out for the FedEx cup.  And we’re in the midst of another hotly contested election for the next POTUS.

That’s a lineup sure to keep Americans glued to our TVs this fall.  And it’s a big reason why CBS Corp (CBS) is on the upswing.

CBS has done a remarkable job of creating top-notch programming.  They’ve done it on all levels… broadcast television, cable networks, publishing, and local broadcasting.  And they’ve been able to charge premium prices because they create better content.

As a result, CBS was able to grow EPS to a record high of 65 cents last quarter.  And analysts have been busy ratcheting up their full year 2012 and 2013 earnings estimates since they reported earnings last month.

As you can see, the rising expectations for CBS have sent the stock soaring.  It has more than doubled from the 52-week low of $17.74.  It also broke out to a new all-time high above the previous high water mark of $35.75 it set back on July 20th, 2007. 

 CBS Corp Chart 

This technical breakout is a bullish signal.  When a stock makes a new all-time high, there aren’t any investors who were trapped in the stock at a higher price.  So you don’t have any more levels of technical resistance from prior highs or resistance levels.   

Put simply, when you combine strong earnings growth and a bullish technical breakout, the sky is the limit for CBS. 

This looks like a great opportunity to pocket some quick profits on a bull call spread on CBS.  This bullish strategy is made by buying one call option and selling another call option at a higher price.

Here’s what to do now…

Buy the CBS December 2012 $39 call for $1.15 and sell the CBS December 2012 $42 call for $0.30.

Remember, when buying a call spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.

This trade costs us $85 ($115 – $30) per spread.  Our breakeven on the trade is $39.85.  If CBS is trading at exactly $39.85 when the options expire in December, we’ll get our $85 back.

We’ve also limited our risk to our initial $85 investment.  If CBS is trading below $39.00 at the December options expiration, we’ll lose $85.  But no matter how far CBS falls, we can never lose more than our initial investment.

Now for the good part… profits!

Our maximum profit of $215 comes if CBS is trading at or above $42 at December options expiration.   

In other words, we’re risking $85 for a chance to make $215.  And according to our tracking system, there’s a 31% chance of this trade making money.  That’s a good risk/reward in my book.

Good Investing,

Corey Williams

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Category: The Spread Trader

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.