Nvidia Stock Bull Call Spread Has Great Upside Potential

Nvidia (NVDA) is consolidating in a tight range, having shown incredible strength this year. Nvidia stock is also above its 21-, 50- and 200-day moving averages and could be setting up for a run toward 300.

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Implied volatility is toward the lower end of the 12-month range, so it’s better to look at debit spreads rather than credit spreads.

A bull call spread is a bullish debit spread that is created through buying a call 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 the June expiration, a 285-strike call option was trading around $15.25 on Friday, and the 290 call was around $13.05.

Potential Profit Of $530

Buying the 285 call and selling the 290 call would create a bull call spread. The trade cost would be $220 (the difference in the option prices multiplied by 100). And the maximum potential profit would be $530 (the difference in strike prices, multiplied by 100 less the premium paid).

A bull call spread is a risk defined strategy. So if Nvidia stock closes below 285 on June 16, the most the trade could lose is the roughly $220 premium paid.

Potential gains are also capped above 290, so no matter how high NVDA stock might go, the most the trade could profit is $280.

The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 282.20.

When To Cut Losses On Nvidia Stock Trade

In terms of trade management, if the stock dropped below the April 25 low of 262.25, I would consider closing early for a loss.

According to the IBD Stock Checkup, Nvidia stock is ranked No. 4 in its industry group and has a Composite Rating of 98, an EPS Rating of 63 and a Relative Strength Rating of 98.

Nvidia is due to report earnings in late May, so this trade would have earnings risk if held until then.

An earnings trade discussed April 26 on Amazon.com (AMZN) worked well for those who took part.

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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 Twitter at @OptiontradinIQ

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