Ride the bull higher—but limit your exposure

Subscribe to enjoy similar stories.Bubbles are only dangerous if improperly managed.Stocks, indexes, and call-option implied volatility are advancing to ever-higher highs, despite innumerable risks that are almost too trite to mention. And yes, some are even calling it a bubble.Once more, we are at the tumultuous intersection of greed and hope.We recently suggested hedging in anticipation of a stock decline, but some investors will prefer to harness the wild-eyed enthusiasm of investor sentiment.We know of some very smart Wall Street pros who recently took profits and regret selling as stocks move higher.

Anyone wondering about risk-defined ways to add exposure to a hot stock and hotter options market should consider so-called bull spreads on the State Street SPDR S&P 500 exchange-traded fund.The strategy entails buying one call and selling another with a higher strike price but a similar expiration. Successful trades regularly produce 100% or greater returns with limited risk.With the SPDR S&P 500 ETF at $738.17, buy the July $750 call and sell the July $780 call.

The spread costs about $10.21.If SPY expires at $780 or higher, the maximum profit is $19.79. If SPY is below $750, the trade fails, which is less costly than buying the ETF and losing even more money.During the past 52 weeks, the SPDR S&P 500 has ranged from $575.60 to $740.79.

So far this year, the ETF is up 8.7%. Spreads are often derided since profits are limited to the difference between strike prices, less the cost, but that’s dumb.