Trading Idea: Vale S.A. (VALE) Debit Spread

Today’s trading idea from the exclusive ONN Idea Generating Platform is a debit spread on Vale S.A. (VALE), a leading producer of iron ore. The moderately bullish strategy, also known as a vertical call spread, reaches its maximum profit potential at December expiration.

VALE Debit Spread Trade Detail
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

VALE is currently trading at 17.65 after being in a controlled move higher since early March.

Debit Spread/Vertical Call Spread –

• Sell one December 25 call (out-of-the-money by 41.6%) for $0.48 (bid price)
• Buy one December 22.50 call (out-of-the-money by 27.5%) for $0.90 (ask price)
• Net debit of $0.42

Remember that if the trader were to establish limit orders in the hopes of trading closer to the "mid" (between the bid and the ask) on at least one side of the spread, then the overall debit could be smaller. Investors may have more luck getting a “mid” price when trading a spread as opposed to a single-legged position.

Profit/Loss Details:

The maximum risk for this spread is $0.42, or the debit paid at the time of the trade. The maximum profit is the difference between strike prices minus the debit, or $2.08 in this example. This profit (395% off the initial debit paid) is achieved if VALE is trading above 25 at December expiration, making both options in-the-money. At this point, the investor can exercise the long call, buy the stock at its lower strike price (22.50) and sell that stock at the higher strike price (25).

The breakeven price for this trade is $22.92, or the strike price of the purchased call plus the debit paid. VALE is about 30% below this breakeven point, but these are December options, so PWE has about six months to move. In the event that VALE does make this move, shareholders would book a 30% profit at this point, compared to the 395% potential profit for the bull call spread trader!

If the stock is trading between 22.50 and 25 at expiration, the long call (the 22.50 strike) will be in-the-money and worth its intrinsic value, while the written call will have no value.

If debit spreads aren’t your favorite strategy, keep an eye on the ONN Idea Generating Platform for additional stock option trading ideas.