by Ron Ianieri | August 2, 2010 7:32 pm
I like Diamond Offshore Drilling, Inc. (NYSE: DO) here with oil up and the U.S. dollar down.
I think it will break the 50-day simple moving average (SMA) and head toward $66. Obviously, we have not broken it yet, but I am willing to jump the gun and not wait for confirmation, which involves taking a little more of a risk.
So, I want a trade that will limit my downside on initiation but can be easily morphed into something more aggressive if the break does occur as I anticipate.
Therefore, I want to buy the DO August 59.25-64.25 call spread for about $2.75.
I have a limited loss of what I spent to buy the spread ($2.75) and a potential profit of $2.25 by August expiration.
If the break of the 50-day SMA does occur, I can choose to buy back my short option in the spread (August 64.25 calls) and then just ride the long option (August 59.25) in stock replacement fashion remembering to roll up to the 64.25 strike if the stock breaks out up to $66. This roll will lock in profits and limit my loss while maintaining the same size position.
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