This morning, when I was contemplating writing something different about yesterday’s unusual options activity, the double spread caught my attention while running through the Options Industry Council’s web page about bullish options strategies.
A double spread is the combination of a Bull Call Spread and a Bear Call Spread. It involves two puts and two calls. Because I’ve got a cold and my head’s a bit clogged, I’ve passed on this strategy. Maybe next time.
Instead, I’ll go with a Covered Call, a strategy that generates income on a stock you want to buy or already own. The covered call is slightly neutral to bullish. It typically involves selling a call with a strike price at or above the current share price. If the share price expires below the strike price, you get to keep your stock and pocket the call premium. If not, you could be forced to sell your shares.
Turning to yesterday’s unusual options activity, RTX (RTX)had one unusually active option. Still, it was a doozy with a Vol/OI (volume-to-open-interest) ratio of 47.83, eighth-highest on the day.
Here’s how you might make this covered call work.
I’m not a big buyer of defense stocks — although I do see why investors like them right now — but RTX is much more than that. It also makes jet engines through Pratt & Whitney and provides smart tech and parts for commercial, business, and military aircraft through Collins Aerospace.
RTX was created in April 2020 through the merger of Raytheon and the remnants of United Technologies, following the spin-offs of Carrier Global and Otis Worldwide. All three stocks began trading on April 3, 2020. They’re up 255%, 304%, and 93%, respectively, in the 67 months since. Clearly, the moves made in 2020 have worked out for all involved.
RTX stock is up 52% in 2025. It hit an all-time high of $181.31 on Oct. 28. Of the 21 analysts covering it, 14 rate it a Buy (4.29 out of 5), with a $192.05 target price, which is 11% above its current share price.
On Oct. 21, RTX reported excellent Q3 2025 results, with organic sales up 13%. It finished the quarter with a backlog of $251 billion ($148 billion commercial and $103 billion defense-related). On the bottom line, its adjusted earnings per share rose 17%. As a result of its strong showing, it raised its 2025 guidance for both.
It now expects sales to increase 8.5% at the midpoint of its guidance year-over-year, with EPS of $6.15 a share, 7.3% higher than in 2024. RLX stock trades at 28.3 times this estimate. While high, the company continues to do a good job filling its backlog. It has nearly three years of work ahead of it.
It’s a solid long-term stock to own.
The first thing that will jump out at you is that the June 18/2026 $120 call is deep ITM (in the money). That’s not typically what an investor would do here for two reasons.
First, the DTE (days to expiration) is significantly longer than 30-45 days, a timeframe that allows option sellers to benefit from time decay as the expiration date approaches while reducing the risk of a significant price move. Secondly, you usually don’t want to risk assignment, forcing you to sell the shares.
So, if I buy 100 shares of RTX stock at $173.77 a share and sell one call for $55.10 in premium, and the share price stays the same over the next 211 days, my profit would be just $1.33 or 0.8% [$120 strike price – $173.77 share price + $55.10 premium]. That’s hardly worth the risk.
The only way a covered call works in this scenario is if the share price falls below $120 by next June. The expected move to the downside is $153.19, still too far from hitting paydirt. Furthermore, an early assignment is more likely, given that three dividend payments are due between now and June.
So, deep ITM covered calls generally make little sense.
Let’s consider a second scenario: you bought 100 RTX shares on Dec. 31, 2024, at $115.72, the closing price that day. The shares have appreciated by 50.2% in the 10.5 months since.
Let’s assume in this case that your 100 shares are called away in February when it’s trading at $153.19 (expected price on the downside by expiration) — before the ex-dividend date — because the buyer of the call that you’ve written wants to pocket said dividend. Not only would you lose out on the March dividend payment, but you’d cap the appreciation from your December 2024 buy at 3.7% [$120 strike price – $115.72 share price / $115.72 share price].
But, and it’s a big but, you’d also have $55.10 in premium income to keep for a total gain of $5,938 [$120 strike price – $115.72 share price + $55.10 premium]. That’s a return of 51.3% or 47.4% annualized [$5,938 profit / $11,572 cost of shares * 12 months / 13 months owned the stock].
Of course, in this second scenario, while there is a legitimate profit, your paper gains from just buying the stock without a deep ITM covered call would be 32.4%, despite the 11.8% decline of RTX stock from November to early February.
Suffice to say, you probably won’t see me recommending deep ITM calls very often. The reward does not match the risk.
While this was more of a thought experiment than anything, I’ll continue to explore outside-of-the-box income-generating options strategies in the weeks ahead. They’re fascinating to me.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
