I just started to try out a new options strategy that benefits from a stock staying above a strike price. The widely known strategy for this would be to sell naked puts. But this requires a high amount of margin and the downside could be very significant. I have come up with a new strategy by buying a vertical call spread in which both strikes are in the money. A call spread does not widen out to its maximum profit potential (the difference between strike prices) until close to expiration and normally trades at a big discount to that max profit potential even if the stock is above both strike prices. So by buying an in the money call spread can take advantage of this discount and make money by betting that the stock will stay above the higher strike price at expiration.
Example: I just bought the GE July 29/30 Call Spread for a .58 debit and GE is trading at $29.95. $30 has been a huge support level for GE in the past 5 years and I believe it'll hold and won't go lower anytime soon. The reasons for GE staying at $30 aren't very relevant to explain the strategy, the point is that this strategy is useful for stocks that you believe are either going higher, or will stay at a certain level. So if GE stays above $30 in 38 days when the July options expire, the 29/30 spread will widen out its maximum profit potential of 1.00 which would yield me a 72.5% return. Not bad for a stock to doing nothing.
So in the above example I have a breakeven point of $29.60 and maximum profit when GE is at or above $30 at expiration. I have noticed on different stocks that buying a call spread one strike below the stock price has an average profit potential of about 50% and buying one two strikes below the stock price has an average profit potential of about 25%. The risk/reward ratio is highly in your favor with this strategy and is a much better alternative to selling naked puts.
