Nvidia (NVDA) looks like it’s back in rally mode as it attempts to retake its 50-day moving average. Nvidia stock trades at its 50-day line.
↑
X
Market Recovery Gives Investors An Early Christmas Present
NVDA stock is up 182% year-to-date and if this year’s trend continues, the stock could rally in anticipation of a positive Q4 earnings announcement. With Nvidia’s market capitalization closing in on $3.3 trillion, it’s the second-most valuable company behind Apple (AAPL).
With Nvidia at a crossroads, investors may be interested in getting bullish exposure but with lower risk. That’s where a bull call spread can help.
Nvidia Stock Today: The Bull Call Spread
A bull call spread is created through buying a call and then selling a further out-of-the-money call. The long call gets you bullish exposure.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the March expiration will encompass the Q4 earnings announcement set for around late February
A 140-strike call option is trading around 14.65, and the 145 call is around 12.40.
Buying the 140 call and selling the 145 call creates a bull call spread. The trade cost in this case is $225 (difference in the option prices multiplied by 100), and the maximum potential profit is $275 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy. You always know your worst-case scenario ahead of time. If Nvidia closes below 140 on March 21, the most the trade loses is the roughly $225 premium paid.
But unlike a long call on its own, the potential gains are also capped above 145. No matter how high Nvidia stock might go, the most the trade profits is $275.
Managing The Trade
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 142.25.
In terms of trade management, if the stock dropped below 130, or if the spread value dropped from $225 to $110, I would consider closing early for a loss.
According to IBD Stock Checkup, Nvidia stock ranks No. 2 in its group and has a Composite Rating of 97, an EPS Rating of 99 and a Relative Strength Rating of 94.
To revisit a past trade, this bull put spread on FedEx (FDX) expired worthless last week for a full profit.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
YOU MIGHT ALSO LIKE:
Gilead Sciences Stock Today: Boost Your Return With This Covered Call Trade
As Tesla’s Big Run Hits The Brakes, This Bearish Option Trade Could Return 17%
An 8% Discount Or $625 In Premium: Two Ways This KKR Stock Option Trade Wins
Taiwan Semiconductor Stock Doesn’t Need To Break Out To Make Money
