Riding the Bull Market with Bull Call Spreads


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By Bryan Perry, Cash Machine

When it comes to maximizing total return from the market-leading stocks, a well-oiled bull-call-spread option program is one of the very few strategies that can drum up heady short-term returns.

The cornerstone of a high-quality bull-call-spread trade is to use Long Term Equity Anticipation Securities (LEAPS) call options to control the most expensive big-name stocks for a fraction of the price of the underlying share. From there, any number of methods can be adopted to sell volatility back to the market in the form of covered-call premium that not only brings in immediate cash to one’s account, it effectively lowers the cost basis of the LEAPS by the amount of the call sold.

I run the bull-call-spread strategy in a manner that targets getting paid every 45-60 days from selling short-term out-of-the-money calls against long-dated, deep-in-the-money LEAPS calls that expire at least a year out. By doing so, I buy plenty of time for my trades to succeed if my fundamental and technical due diligence pan out. Because I’m buying deep-in-the-money, I am paying for a lot of intrinsic value and very little in time premium. It is how I get paid all year long for being in assets that appreciate by 3-5 times the rate of the underlying stock.

Stocks like Boeing (BA), Adobe Systems (ADBE), Goldman Sachs (GS), Apple Inc. (AAPL), Northrop Grumman (NOC), Broadcom (AVGO) and Mastercard (MA) are just a few examples of the kinds of blue-chip, big-cap stocks that are bearing the torch of the current bull market rally. However, to own 500 shares in 10-12 of these hot names would require about $1 million, which most retail investors simply do not have on hand. But by buying one-year LEAPS options on each name for a fraction of the cost of owning the stocks outright, an investor can control a portfolio of the same 10-12 heavyweight names for around $100,000.

If $100,000 sounds like a lot, then start with $50,000 or $25,000 and buy fewer LEAPS contracts to get acquainted with how the trading strategy works. Take Boeing (BA) for instance. The company has a virtual monopoly on the commercial airplane business other than its one main rival, Airbus. Boeing shares are in a major bullish trend with order backlog going through the roof. That outlook is reflected in sales and earnings.

On February 1, 2017, with the stock trading at $165, I recommended the Boeing January 2018 $135 Call for $31.00 per contract. We filled that trade. That contract, to be profitable, has to trade at $166 ($135 + $31 = $166). At the same time, I recommended selling a like number of contracts of the Boeing March 17, 2017, $170 Calls for $5.00 per contract.

As it turned out, the stock closed above $170 on March 17 and converted the LEAPS contracts into shares of stock because the position was being called out the following Monday at $170. To illustrate, we sold the right for someone to buy our position at $170. In doing so, we make $4 in gains on the LEAP ($166 cost + $4 = $170) and pocket the $5 of call premium for a total of $9 in gains and option premium. When we divide that $9 into our $31 cost basis for the Boeing January 2018 $135 Calls, we bank a very handsome profit of 29% for a holding period of only seven weeks.

If we sold the Boeing March 17 $170 Calls for $5.00 and shares of Boeing closed below $170 on March 17, we would continue to keep the Boeing January 2018 $135 Calls and pocket the $5 premium. If we divide the $5 into our $31 cost basis, we would have made 16% over the same time period and gone out to April or May and sell more out-of-the-money calls and repeat this trade over and over again, hopefully all year long.

It doesn’t take a math wizard to figure how much can be realized in total return when 5-10 positions like this are at work. The potential gain is tremendous and it’s also exciting and a heck of a lot of fun to win big on pricey stocks using the power of leverage without using a margin account. I run a LEAPS advisory service called Instant Income Trader that utilizes this hybrid bull-call-spread strategy. Our average returns between both called out trades and just bringing in monthly option premium is 21%. And we’re not even into our first full year of service. It’s how I like to be in the very best leading stocks at a fraction of the price and have a cash generating method in place that pays like a champ. You can find out more about Instant Income Trader by clicking here.

Bryan Perry is an income-investing expert who writes a monthly investment newsletter, Cash Machine.