The stock and options markets are forming a potential tense situation, and investors can profit from it.

As bearish portfolio strategists become more bullish, the S&P 500 continues to hit new highs, but the trading community remains increasingly skeptical.

Whenever a bank raises its year-end S&P 500 index target or discusses the enormous impact of artificial intelligence technology on corporate earnings, many traders express doubts.

They are concerned that stocks may face the risk of corrective pullbacks. Some point out that the Chicago Options Exchange Volatility Index (VIX) is at an exceptionally low level, and when stocks rose on Monday, VIX also rose, indicating that some people bought put options while the stock market was rising. When the stock price falls, the value of put options rises, and VIX usually falls when stocks rise.

The sharp rise in stocks has also led to investor envy and a trend of FOMO (fear of missing out) that drives stock prices higher. Recently, FOMO sentiment has intensified due to good economic reports, reinforcing the view that the Federal Reserve does not need to raise interest rates to cool a strong economy.

When volatility is low and stock prices are high, options become a reasonable substitute for stocks. The cost of call options is lower than the price of the underlying stock, and the classic advice in this situation is to sell stocks and buy call options. The stock replacement strategy is an iterative process of buying low and selling high, as high-priced stocks are sold and replaced with low-priced options.

For long-term investors, a better way than selling stocks and buying options is to hold stocks to avoid paying capital gains taxes when selling.

For investors who are worried about an overheated stock market, a more complex option strategy worth considering is the bull call spread. This strategy involves buying a call option and selling another call option with a higher exercise price and the same expiration date. It allows investors to profit within a specified price range. If all goes according to plan, the bull call spread strategy can produce a return of 100% or more.

Take [something] as an example. This chip company has risen due to the enthusiasm for artificial intelligence. Technical analysis of the moving averages of Broadcom shows a healthy upward potential. If the company strengthens its stock trend in the third quarter financial report, it may consolidate this extraordinary stock trend until the end of the year.$Broadcom (AVGO.US)$For example. This chip company has risen due to the enthusiasm for AI. Technical analysis of Broadcom mobile moving averages shows healthy upward potential. If the company strengthens its stock trend in the third quarter financial report, it may consolidate this extraordinary stock trend and continue until the end of the year.

Currently, Broadcom's stock price is $1,802.52 per share, and investors can buy a December $1,900 per share call option and sell a December $2,100 per share call option for a cost of about $66. If the stock price reaches $2,100 per share at expiration, the maximum profit of the bull call spread is about $134.

The core of this strategy is to set a price range for the underlying stock. If the stock rises as expected and reaches a higher exercise price, the investor will capture the entire price increase or spread. The disadvantage of this strategy is that if the stock falls, you will lose the $66 option premium paid. However, this is much cheaper than buying a stock and then seeing its value decline.

The limitation of this strategy is that investors only participate in the return up to the higher exercise price. Beyond this price, they no longer have exposure to the stock. Nevertheless, the bull call spread has a maximum profit of about 203%, which is quite remarkable.

We chose Broadcom to illustrate this strategy because the significant returns generate huge FOMO sentiment. For anyone concerned that market tension may escalate into a more serious problem, this strategy is worth serious consideration.

As of press time, Broadcom's pre-market trading rose by 0.69%, to $1815.

Edited by Jeffrey