Life Storage (LSI) jumped past a new flat base and its entry point of 140.05, part of a base-on-base formation. This powerful chart pattern has spawned big winners in the past. In options trading, growth investors can benefit from breakouts, too.
XLSI stock also deserves attention as the IBD 50 Stocks To Watch pick for Monday.
Let's assume an investor spies a price target for LSI stock of 155. One way to take advantage of that price? Use options and trade a bull call spread. A bull call spread is a defined risk trade, so you always know the worst-case scenario in advance.
To set up the bull call spread in options trading, simply buy a call and then sell a further out-of-the-money call.
Options Trading: Why Consider The Bull Call Spread?
Selling the further out-of-the-money call reduces the cost of the trade. But that move also limits the upside.
Going out to March expiration, a 150-strike call option was trading around $4 Tuesday. The 155 call hovered near $2.50.
Buying the 150 call and selling the 155 call would create a bull call spread. The trade cost would be $150 (difference in the option prices multiplied by 100), and the maximum potential profit would be $350 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy in options trading. So, if LSI stock closes below 150 on March 18, the most the trade could lose is the roughly $150 premium paid.
Your potential gains also get capped above 155. So no matter how high LSI stock might go, the most the trade could profit is $350.
Managing The Trade
If the spread dropped from $150 to $75, or if the stock dropped below 130, I would consider closing early for a loss.
Life Storage likely will report quarterly earnings in early February. So earnings risk exists with this trade unless a trader closes it before then.
More aggressive players in options trading may prefer just to buy the 150-strike call. A long call trade has unlimited upside potential.
LSI is ranked number three in its group and it has a Composite Rating of 97, an EPS Rating of 91 and a Relative Strength Rating of 95.
LSI stock is sitting above rising 21-, 50- and 200-day moving averages.
Please remember that options are risky, and investors can lose 100% of their investment.
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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