A Long-Term Bull Put Spread Trades on Dell (NASDAQ: DELL)

Fourth-quarter earnings are expected from Dell (NASDAQ:DELL) after the close on February 18th (the day before February options expire), but one investor was looking much longer-term in the PC manufacturer on Wednesday, selling a put spread in the January 2012 series.

Exactly 5,000 contracts traded on both the January 2012 12.50 put and the January 2012 15 put during the day. Heading into the session, these LEAPS puts were home to respective open interest of 707 and 808.

About an hour into the trading day, blocks of 4,700 contracts traded on both puts, with the 12.50 strike trading near the ask price at $1.83 and the 15-strike put going off near the bid price of $2.95. This would suggest that the higher-strike put was sold while the lower-strike was purchased. The investor executing this vertical spread, also known as a bull put spread (or short put spread) collected about $1.12 for the overall spread.

This is the maximum profit for the bull put spread strategy, and will be retained assuming Dell is trading above 15 at January 2012 expiration in two years. (On Wednesday, the stock closed up a fraction at $15.07). The maximum loss is limited to $1.38, or the difference in strike prices minus the credit collected.

Of course, this trader doesn’t need to maintain this position for two years; he can buy back the spread if his outlook on DELL changes or if a target profit or stop-loss is achieved in DELL shares.

For more on Dell:

Is Dell (DELL) Ready for a Rebound?

Midday Glance: Computer companies