Options Basics | Fundamental Fridays Ep. 17 — #CAT Bull Call Speed
This episode picks up a Caterpillar trade from the week before: a long call spread, also known as a bull call spread (or, in old trading-floor language, a vertical), built heading into Caterpillar’s earnings report. Brian bought the 840 strike call and sold the 880 strike call in the same expiration, betting that elevated implied volatility around the earnings date — the options equivalent of hurricane-season insurance pricing, as he puts it — would make that spread worth putting on rather than buying a call outright on an $840 stock.
The trade worked about as well as a bull call spread can: Caterpillar ran hard after earnings, blowing straight through the 880 short strike and touching the 930 area before settling back down near 840 by the time this episode airs. Brian is upfront that the position should have been closed the moment it cleared 880 — once a defined-risk spread hits its max value, there’s little reason to keep holding it, since time decay is the only thing still working in its favor. Having missed that exit, he uses the pullback as a teaching opportunity: what do you do with a winning spread that didn’t get closed out and has now round-tripped some of its gains?
His answer is a roll, not a fold. Since the stock has fallen back near the 840 level, Brian buys to close the short 880 call and sells to open a new short call at the 860 strike, keeping the same September expiration since you can’t roll a spread beyond the expiration of the long option you already own. That single adjustment brings in a fresh $7 net credit to the account, which lowers the overall cost basis on the whole spread substantially — in exchange for giving up 20 points of potential upside, the position now caps out at 860 instead of 880, but the trade locks in a real, tradeable profit on the short leg regardless of what Caterpillar does next.
The broader lesson Brian keeps circling back to is that most traders know what to do when a trade is an obvious winner or an obvious loser — it’s the in-between cases, like a spread that ran through its target and then pulled back, that trip people up. A bull call spread around an earnings report caps the maximum gain compared to owning the call outright, but it also caps the cost and the risk, and it leaves room for exactly this kind of mid-course correction when the stock doesn’t behave in a straight line. By the end of the episode, the position is long the 840 call and short the 860 call, still 20 points wide, with a meaningfully lower net cost than where it started — a cleaner, better-defined trade than the one Brian was originally sitting on.
