Trade of the Day: Gold Miners (GDX) Bullish Spread

The Trade

Trader executed the December $60/$66 call spread 29,449x for a $2.20 debit, $6,478,780 total, and sold the December $50 put 44,176x for a $1.90 credit, $8,393,440 total. Total credit for spread is $1,914,660.

Maximum loss is $218,965,340. Profit potential is limited to $19,584,060 at $66. Break even for the trade is $49.57. Graph below shows risk profile of the spread.

Trade is a bet on the continuation of gold's uptrend, GDX looking for a bounce to $66 from current levels near $59. Chart below highlights profit potential for the spread.

http://seaofopportunity.blogspot.com/*

Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Options 101: The Call Backspread

A back spread, or ratio back spread, is a bullish spread that consists of selling a number of call options and buying more options of the same underlying stock with the same expiration date at a higher strike price. In other words, a back spread has more long contracts than short contracts. When reading this type of spread, the lower strike is generally stated first, whether it is long or short. Back spreads are very flexible, and can be executed for debits, credits, or even money when there is no debit or credit.

The back spread profits when the underlying stock price makes a move to the upside toward, through and beyond the long strike. The call back spread has limited risk and unlimited profit potential. The bigger the ratio of short options to long options, the more risk involved.