Nvidia Stock Attempts A Bottom; Will This Bull Call Spread Earn You $305?

Nvidia (NVDA) bounced 5% in accelerating turnover amid Tuesday’s broad, sharp market rebound. Yet with the market still in correction, purchases in Nvidia stock and any other growth company now carry even higher risk.

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So, may options offer a better strategy? One way to take a bullish exposure in a name such as Nvidia stock without risking too much capital: Try a bull call spread.

What Is A Bull Call Spread?

Create the bull call spread trade by first buying a call option and then selling a further out-of-the-money call.

Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.

Going out to December expiration, a 140-strike monthly call option was trading around $10.00 on Tuesday, and the 145 call at around $8.05.

Nvidia Stock Today: Setting Up A Call Spread

Buying the 140 call and selling the 145 call would set up a bull call spread. The trade cost would be $195 (difference in the option prices multiplied by 100), and the maximum potential profit would be $305 (difference in strike prices, multiplied by 100 less the premium paid).

We can view a bull call spread as a risk defined strategy. So if NVDA stock closes below 140 on December 16, the most the trade could lose is the roughly $195 premium paid.

Potential gains get capped above 145, so no matter how high NVDA stock might go, the most the trade could profit is $305.

In terms of trade management, if the stock dropped below 120, I would consider closing early for a loss. 

Nvidia stock also crossed back above the 21-day exponential moving average.

According to IBD Stock Checkup, NVDA ranks a rather lowly 16th in its group and has a Composite Rating of 38, an EPS Rating of 84 and a Relative Strength Rating of 16.

Nvidia is due to report earnings towards the end of November, so this trade would have earnings risk if held until then.

Please remember that options are risky. Investors can lose 100% of their investment. 

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 Twitter at @OptiontradinIQ

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