It has been no surprise to anyone that the market has been extremely volatile lately. There are still good option plays out there, but an option trader may want to take a more conservative approach than he or she maybe would normally do.

CF Industries (NYSE:CF) looks like it could be a good example. CF was below $140 at the beginning of August and had a nice move to above $190 by the end of August. The stock pulled back in the middle of last week, possibly due to some profit-taking, and gapped down on Friday, basically filling the gap above a support area of $180.

The stock needs to hold that area. CF looks like a good bet to test those previous highs from last week. Using a bull call spread instead of long calls is a more conservative approach in case the market or stock decides to fall. And remember: Call options can be expensive for a $180 stock.

A bull call spread involves buying a call option and selling a higher-strike call option against it. The cost of buying the lower strike call option is somewhat offset by the premium received from the higher strike that was sold. Not only is the cost of the trade lowered, so is the delta (the rate of change of the option compared to the underlying stock’s rate of change), because there is positive delta from the long call and negative delta from the short call. A smaller delta means smaller gains and losses on the trade.

The Trade: Buy September 185/190 Bull Call Spread (buying the September 185 call and selling the September 190 call) for $2.05 or less. 

The maximum potential profit for this trade is $2.95 ($5 – $2.05), if CF is trading above $190 at September expiration. The maximum loss is $2.05 (or what was paid for the spread), if CF is trading below $185 at September expiration.  Break-even is reached if CF is trading at $187.05 at expiration. 

The spread can always be exited early for a profit or loss.