Easily the most consequential event in the market last week was the announcement of new tariffs under the Trump administration. Labeled Liberation Day, the levies were intended to bolster domestic industries through protectionist policies — and they eventually may do just that. But for now, the red ink flashing across Wall Street demonstrates an anticipation of pain, not prosperity.
Many if not most investors may be tempted to pull back from this environment. However, the chaos caused by the latest round of tariffs present opportunities for astute traders. Specifically, market participants will want to keep their eyes on Celsius (NASDAQ:CELH) call options this week.
In particular, market makers are offering what I believe is a solid deal on the 32.50/37.50 bull call spread expiring next Thursday, April 17. This transaction involves buying the $32.50 call and simultaneously selling the $37.50 call. The proceeds from the short call partially offset the debit paid for the long call, resulting in a net cash outlay of $284.
Should CELH stock reach the short strike price of $37.50 at the expiration date, the reward comes out to the difference between the strike prices (multiplied by 100 shares) minus the cash outlay or $216. This calculation translates to a payout of over 76%.
What makes this call spread special is the gap to break even, which sits at $35.34. As of Friday’s close, CELH stock is already more than half-a-percent above where the call spread is profitable. So, in order to make some money, CELH doesn’t need to move up. Instead, it just needs to stay flat.
To be sure, in order to collect the maximum reward, CELH stock will need to rise to $37.50, which is 5.51% above Friday’s close. Still, this trade allows the equity to move against the trader and still be somewhat profitable, making it a relatively unique proposition.
Mathematically, the aforementioned call spreads for CELH stock truly pop because the underlying risk modeling is favorably inefficient for the risk taker. Frankly, you’re not going to get this kind of market intelligence reading cookie-cutter financial publications.
Consider the current risk profile of CELH stock. Since January 2016, the odds that on any given two-week period, CELH will move higher is 53.85%. Interestingly, Barchart notes that this call spread features a probability of profit of only 51.5%.
However, this math isn’t quite accurate. We’re not interested in the odds that CELH stock will move up in any given two weeks; rather, we’re interested in understanding the probability that CELH will at least not lose more than 0.56% during the aforementioned time period.
Under this framework, the odds rise from 53.85% to 54.77%.
Is a 0.92% difference earth-shattering? Perhaps not — but here’s the point. Market makers are pricing the aforementioned call spread with the assumption of a 54% success ratio. However, the empirical success ratio is higher at nearly 55%. In other words, you’re receiving almost a percentage point of greater probability for free.
To put it another way, the house is giving you the advantage, should you want to play. Therefore, if you were already planning on speculating in the options market, you may want to give CELH stock a closer look.
