DAL stock is above its 21-, 50- and 200-day moving averages and broke out Wednesday from a tight handle in its cup-with-handle base.
While the chart looks good, there is still a lot of recession talk lingering, so some investors may prefer to use the options market to gain exposure to DAL stock.
One way to do that is via a bull call spread.
A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the June expiration, a 40-strike call option was trading around $3.40 Wednesday, and the 45 call was around $1.35.
Maximum Return For Trade $295
Buying the 40 call and selling the 45 call would create a bull call spread. The trade’s cost would be $205 (the difference in the option prices multiplied by 100). And the maximum potential profit would be $295 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy. So if DAL stock closes below 45 on the June 16 expiration, the most the trade could lose is the roughly $205 premium paid.
Potential gains are also capped above 45, so no matter how high DAL stock might go, the most the trade could profit is $295.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 42.05.
In terms of trade management, if the stock dropped below 38, I would consider closing early for a loss.
DAL Stock Ranked No. 1 In Its Industry
Delta Air Lines is due to report earnings in mid-April. So this trade would have earnings risk if held until then.
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Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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