This Bull Call Spread On Nvidia Stock Has Great Upside Potential
If Nvidia stock finishes above 290 at June expiration, this bullish option trade will profit.
Nvidia's (NVDA) stock is consolidating within a narrow range after displaying incredible strength in this year. Nvidia's stock is above its 21-day, 50-day and 200-day moving averges and could be preparing for a move towards 300.
Credit spreads are better than debit spreads to consider because implied volatility is at the lower end.
Bull call spreads are bullish debit spreads created by buying a call, and then selling another out-of the-money call.
The cost of trading is reduced by selling the call that is further out of the money, but the upside potential also gets limited.
On Friday, the 285 strike call option traded at around $15.25, while the 290 strike call option traded at around $13.05
Profit Potential Of $530
A bull call spread would be created by buying the 285 call while selling the 290. The cost of the trade would be $220, which is equal to 100 times the difference between option prices. The maximum profit potential would be $530. (The difference in strike prices multiplied by the 100th power less the premium).
A bull call spread can be defined as a strategy with defined risks. If Nvidia's stock closes at 285 or below on June 16, then the maximum loss is the $220 premium that was paid.
The potential gains are also capped at 290. This means that no matter how high the NVDA share price might rise, the maximum profit the trader could make is $280.
The price at which the trade will break even is equal to the strike price of the long call plus the premium. In this case, the premium would be 282.20.
How to Cut Losses on Nvidia Stock Trade
If the stock fell below the low of April 25, 262.25 I would consider closing the trade early at a loss.
Nvidia is ranked number four in its industry group according to IBD Stock Checkup. Nvidia is ranked No. 4 in the industry group, with a Composite rating of 98 and an EPS rating of 63.
Nvidia will report its earnings at the end of May. This trade has a risk in terms of earnings if it is held until then.
The Amazon.com (AMZN), April 26, earnings trade was a success for all who participated.
Investors can lose their entire investment if they choose to invest in options.
This article is intended for educational purposes and does not constitute a recommendation to buy or sell. Always do your due diligence before making any investment decision.