With the S&P 500 Index in the midst of a symmetrical triangle, many stocks have spent their November in consolidation mode.� Indeed, coming off one of the best Octobers in history, many would say some digestion time was more than warranted.
While some stocks have seen consolidation arrive in the form of a symmetrical triangle (like the S&P 500), others have formed ascending triangles or rectangular bases.
Regardless of the variations, the digestion of gains is healthy and often acts as the staging ground for yet more upside.� One such stock finding itself in the midst of an ascending triangle is VMware Inc. (NYSE:VMW).
After rallying 30% in October, this tech player has been resting near the century mark for three weeks before running above $102 in Monday�s trading. With this break above $101, traders looking for bullish exposure to the �cloud� space would do well to consider VMW here before it goes higher.
One play worth considering is the purchase of a January bull-call spread. This call vertical spread provides a limited-risk/limited-reward way to exploit a rise in stock prices.
Given its hedged nature, it also reduces your exposure to adverse moves in volatility and time decay. This spread consists of buying a lower-strike call option while selling a higher-strike call in the same expiration month.
The way to play it is to �Buy to Open� the VMW Jan 100 Call option while you �Sell to Open� at the same time the VMW Jan 110 Call option for under $5. At current prices, you might pay $8.80 to buy the Jan 100 Call and collect $4.10 on the short $110 call, for a net debit of $4.70.
The max risk is limited to the debit paid to enter the trade, and the max reward is limited to the distance between strike prices ($10) minus the net debit.� If entered around $4.70, the max risk would be limited to $470, while the max reward is capped at $530 ($10- $4.70).
Source:� MachTrader
At the time of this writing Tyler Craig had no positions in VMW.
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