A call spread on Rackspace Hosting (NYSE: RAX) could be profitable for options trading investors if the stock continues its steady rise before the May 20 expiration. This trade is a good example of the plusses and minuses of options. The trader spends a fraction of someone going long the stock, but the upside potential is limited.

RAX operates in the hosting and cloud computing industry, providing information technology (IT) as a service, managing Web-based systems for small and medium-sized business, as well as large enterprises worldwide. It is scheduled to announce earnings on May 9.

Revenues were up nearly 24% last year driven by adding new customers and by providing more services to existing customers. Reports show that retail online sales for RAX have gained traction in recent quarters. Our outlook for the IT sector is positive as we see a stabilizing economy that could contribute to extended growth and near-term momentum.

With RAX trading at 44.75, near its 52-week high of 45.41, we think there is potential for more upside, though not much. We would consider buying a call spread.

An investor could purchase the RAX May 46/47 call spread for a debit of $0.35.

That is, buy the RAX May 46 Call for 1.80 and sell the RAX May 47 Call for $1.45.

The risk to the investor is the purchase price — $35. The investor breaks even on the trade when RAX reaches $46.35.

The maximum return on the spread is $1.00 (difference in strike price 46 – 47 = 1.00). That return will occur if the stock price exceeds $47. So the investor can earn a maximum of .65, or $1.00 minus the $0.35 cost.

Therefore, the investor is spending $35 to earn $65. This trade won’t put a Mercedes in the garage but it offers a strong percentage return on a good stock.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.