Options Basics | Fundamental Fridays Ep. 16 — The CAT Earnings Play: How to Trade a Bull Call Spread Around High Implied Volatility

Earnings season is one of the most misunderstood environments in options trading. Most beginners either avoid it entirely or charge straight in buying outright calls, paying a premium so inflated it needs a massive move just to break even. In Episode 16 of Fundamental Fridays, Brian Overby — author of The Options Playbook and a veteran of the CBOE trading floor — walks through a smarter third path: the bull call spread, also known as a vertical spread or call debit spread. Using Caterpillar (CAT) as a live example inside the Tradier paper trading platform, Brian shows exactly how to structure a defined-risk bullish position that accounts for elevated implied volatility, caps your cost, and still gives you meaningful upside exposure through an upcoming earnings report.

This is one of the more complete, practical sessions in the Fundamental Fridays library. Brian doesn’t just explain the concept — he builds the trade live, discusses the profit and loss graph, talks through Delta as a probability proxy, and explains where the name “vertical spread” actually comes from. If you’re ready to move past single-leg options and start thinking in spreads, this is the episode to watch.

**The Volatility Problem Around Earnings: The Hurricane Analogy**

Before placing any trade, Brian frames the fundamental challenge. Options are insurance products — and insurance gets expensive when risk is known and imminent. He uses homeowner’s insurance as the analogy: the price spikes when a hurricane is visibly heading toward your house. You can’t buy cheap coverage at that moment, and neither can options buyers around earnings.

For Caterpillar heading into its August 3rd earnings report, the numbers tell the story directly. CAT’s normal implied volatility runs around 24–25%, possibly up to 30% given recent AI-driven market activity. With earnings approaching, the at-the-money 35-day call option on CAT — the 815 strike — is priced at $56, implying volatility of around 50%. That’s roughly double normal. Buying that call outright costs $5,600 per contract. The stock has to make a massive move just to generate a profit, let alone recoup the premium you paid.

The reason the stock is in focus at all: data center build-outs and AI infrastructure CapEx have driven significant demand for heavy equipment. CAT has had a strong year, pulled back some, and is widely expected to report solid earnings — but expectation of a good report is already baked into that elevated vol. Market perception, not the actual earnings number, will drive the reaction.

**What a Bull Call Spread Does (and Why It Works Here)**

A bull call spread has two legs: you buy a lower strike call (the one that benefits if the stock rallies) and sell a higher strike call against it (to offset cost). The two positions partially cancel each other out, which is why the spread costs significantly less than the outright call — but it also caps your maximum profit at the width of the spread.

Brian’s setup on CAT:
– Buy the 825 strike call (just out of the money, September 4th expiration)
– Sell the 880 strike call (same expiration, 55 points higher)
– Net debit: approximately $23.25 (after working the midpoint)
– Maximum profit: $2,523
– Maximum loss: $2,970

By selling the 880 call, Brian cuts the cost of the trade roughly in half compared to buying the 825 outright. He gives up any profit above $880 at expiration — but that’s a 65-point move from current levels. The spread still gives meaningful upside participation through the earnings event while keeping the total dollar risk defined and manageable.

**Reading the Profit and Loss Graph**

One of the most educational moments in the episode is when Brian pulls up the P&L graph on the Tradier analysis tool and walks through what it’s showing.

The blue line represents the P&L at expiration. The dotted line is the P&L as of today. Between those two lines sits the cost of time decay — the “battle” between the two legs of the spread.

Because you’re both long and short an option at the same time, the positions fight each other. The option you bought wants the stock to go up; the option you sold wants it to stay below 880. Interestingly, you actually make more at expiration if the stock gradually moves through both strikes over the life of the trade than if it gapped there instantly. That’s because time decay benefits the short leg more as time passes, improving the overall position’s value.

The 55-point width between strikes is intentionally generous — Brian wants enough room for CAT to run after a positive earnings reaction while still giving the short strike a buffer.

**Delta as a Probability Tool**

Brian uses the 825 call’s Delta of .35 to frame the trade’s probability of success. Delta isn’t just how fast the option moves relative to the stock — it’s also a rough probability that the option finishes in the money at expiration.

A .35 Delta means there’s approximately a 35% chance the 825 strike is in the money at the September 4th expiration. Brian’s comparison: when a weather forecast says 35% chance of rain, it feels like it rains surprisingly often. For a bullish earnings trade, 35% is a reasonable baseline probability given you’re already out of the money.

The further out of the money you go (lower Delta), the cheaper the spread — but the lower the probability. The key is finding a balance between cost reduction and realistic probability of reaching the target.

**The Wheel Still Running: Apple, Netflix, Amazon**

The episode doesn’t exist in isolation — it’s part of an ongoing multi-position paper trading portfolio that Brian runs across the Fundamental Friday series. Quick updates:

Apple ($302): The stock pulled back after earnings, which may create an opportunity to roll or close the short 310 call. The long 250 call provides downside participation. Brian notes Apple got hit partly on chip supply constraints despite strong demand — a common post-earnings reset after a big run-up.

Netflix: The wheel position is holding 100 shares with a short 73 strike call expiring August 7th. If called away, Brian goes back to selling puts. If not, the position builds toward 200 shares and two additional short calls.

Amazon: The butterfly trade placed the prior week is still live and performing.

The CAT bull call spread adds a new, more advanced strategy to the mix — appropriate for anyone who’s worked through the basic wheel trades and is ready for multi-leg positions.

**Vertical Spreads: Where the Name Comes From**

Brian takes a detour into trading floor history that’s more useful than it sounds. The term “vertical spread” comes from the physical layout of floor quote boards. When a trader quoted a spread using two strikes in the same expiration month, their eyes moved vertically up and down the board — same column, different rows. When two different expirations were involved (a calendar or time spread), the eyes moved horizontally across columns. Vertical and horizontal. That’s all there is to it.

Today the terms persist: bull call spread, call debit spread, and vertical spread all refer to the same structure. Brian points to optionsplaybook.com for the full glossary of AKAs.

**Execution on Tradier: Working the Midpoint**

Brian walks through the actual trade entry on the Tradier platform. The theoretical midpoint on the 825/880 spread was approximately $22.25 when he first priced it. By the time he went to enter, markets had moved slightly. He sets the limit at $23.25 — a dollar above midpoint — to improve fill probability on an earnings-driven underlying that’s actively traded with tight markets.

The order goes in as a limit debit spread: buy the 825 to open, sell the 880 to open, September 4th expiration, good for the day.

Everything is done inside the Tradier paper trading account — which Brian recommends as the starting point for any beginner before risking real capital on multi-leg strategies.

**What to Watch Next**

Brian closes by flagging what to track as the trade develops. If CAT earnings are received poorly and the spread loses roughly half its value, he’ll close it out — don’t let a defined-risk trade become a max-loss trade by holding through a clearly broken thesis. If the stock moves favorably and approaches or clears the 880 strike, he’ll evaluate whether to take profits or roll the spread higher to capture continued upside.

The Automation Station, Options Guy TV, and Fundamental Fridays all continue next week. For beginners, Brian recommends signing up for a Tradier account via the link in the description to receive the four-part basic options video series — covering pricing, Delta, and the foundational concepts that underpin every trade shown on the show.