Aeropostale Call Spread

We really like Aeropostale and in fact wrote about this stock in our last newsletter after adding it to our buy list. Investors could choose to be long the stock or buy a call option, either will work. However, we decided to enter a call spread position instead of buying the stock outright. We bought to open the Oct $29 call and sold the Oct $35 call for a net credit of $1.95. In short, we got in at a great option price using the net credit spread. We really liked the risk reward tradeoff on this position. For $1.95 per contract, we get a potential gain of $6, which translates to a 200% option gain if the stock price rises just 24% by October. That is the beauty of options and leverage. The most we can lose is the $1.95 per contract which equates to a share price decline under 7%. In other words, if we held the stock instead of the option, and the share price fell more than 7%, we would lose more money holding the stock. The retail sector has been performing better than expected and we think that momentum will rise over the remainder of this year. With that in mind, we think our Aeropostale position could be very profitable prior to expiration in October!