Uber Technologies has maintained strong relative strength in recent months and is a current IBD Leaderboard stock with a full position weight.
Uber stock is above its 21-, 50- and 200-day moving averages and on Tuesday closed near the high of the day.
Implied volatility is near a 12-month low, 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 January expiration, a 50-strike call option was trading around $3.35, and the 55-strike call was around $1.70.
Setting Up Uber Stock Trade
Buying the 50 call and selling the 55 call would create a bull call spread. The trade cost would be $165 (difference in the option prices multiplied by 100), and the maximum potential profit would be $335 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if Uber stock closes below 50 on Jan. 19, the most the trade could lose is the roughly $165 premium paid.
Potential gains are also capped above 55. So no matter how high Uber stock might go, the most the trade could profit is $335.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 51.65.
In terms of trade management, if the stock dropped below 45, I would consider closing early for a loss.
Uber Stock No. 2 In Its Group
According to the IBD Stock Checkup, Uber stock is ranked No. 2 in its industry group and has a Composite Rating of 87, an EPS Rating of 76 and a Relative Strength Rating of 96.
Uber Technologies is due to report earnings in late October. So this trade would have earnings risk if held until then.
Last month, we looked at an unbalanced condor on Uber stock that worked out well.
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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
