InterMune Singled Out for a Bullish Options Strategy

ITMN was trading just north of $47 at the time the spread was initiated, placing both calls well out of the money. By purchasing the lower-strike calls, the speculator is revealing an expectation that ITMN will rally beyond $65 per share by the time June-dated options expire in about seven weeks. Given the initial net debit of $2.05, break-even on the trade stands at $67.05. If ITMN climbs above this benchmark prior to expiration, the spread will begin to return profits.

However, the sale of the higher-strike calls inherently limits this trade's profit potential. No matter how high ITMN rallies prior to June expiration, the speculator's maximum possible gain is limited to the difference between the two strike prices, less the initial net debit -- in this case, $7.95.

In the best-case scenario, ITMN would finish squarely at $75 upon June expiration. This would reap the largest possible profit on the purchased calls, while the sold calls could be left to expire worthless.

Of course, the speculator can still collect the same profit if ITMN should finish significantly north of $75 -- but if the equity stages a major breakout above the sold strike, there's an opportunity loss involved. A single purchased call would have resulted in a greater initial debit and a higher break-even point, but it would also offer the possibility of potentially unlimited profits.

On the charts, InterMune is off about 4% today amid widespread selling pressure. The stock recently found support at its 10-week moving average, but it's struggling to break out above the $48-to-$50 region. This area has capped ITMN's progress since late March.

Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.