Large gains in Facebook spread

A short-term trade in Facebook scored big before expiring yesterday.

On July 18, Investitute’s scanners detected a bullish vertical spread in contracts that expired at yesterday’s close. A trader purchased 9,200 Weekly $170 calls for $0.93 and sold 9,200 Weekly $177.50 calls for $0.24, resulting in a net cost of  $0.69 with shares at $161.64.

Yesterday the $170 calls traded up to $3.45 while the $177.50 calls expired worthless, representing a theoretical profit of 400 percent. The stock rose just 7.2 percent in the same time frame, showing how options can far outperform their underlying shares.

In vertical spreads such as this, the sale of the higher-strike contracts reduces the cost of the long calls but limits potential gains. In this case, the investor would have faced the obligation to sell shares if they rose above $177.50.

FB rose 1.18 percent yesterday to close at $172.45. The social network surpassed quarterly expectations and reported strong user growth Wednesday afternoon.