Cava stock has had a healthy gain since it burst above the 50-day moving average and joined SwingTrader on Aug. 9. Though the market indexes have come down, Cava stock is holding well above its 21-day line with strong relative strength. Investors interested in taking some bullish exposure can do so with much lower risk through a bull call spread.
Bull Call Spread On Cava Stock
A bull call spread 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 December expiration, a 110-strike call option traded around 20.95 and the 140 call is around 7.95.
Buying the 110 call and selling the 140 call creates a bull call spread. The trade cost at those prices is $1,300 (difference in the option prices multiplied by 100). A bull call spread is a risk-defined strategy, so if Cava stock closes below 110 on Dec. 20, the most the trade loses is the roughly $1,300 premium paid.
The maximum potential profit is $1,700 (difference in strike prices, multiplied by 100 less the premium paid). It's a nice return on risk in a short period of time. But it's not unlimited like a straight long call.
The downside of reducing the cost of the trade with the short call is you also reduce the potential gain. If Cava stock gets above 140 on Dec. 20, no matter how high it goes the most the trade makes is $1,700.
Managing The Trade
The break-even price for the trade is equal to the long call strike plus the premium, which in this case equals 123.
According to IBD Stock Checkup, Cava stock is ranked No. 1 in its group. It shows a Composite Rating of 98, an EPS Rating of 81 and a Relative Strength Rating of 99.
The company is due to report earnings in late November, so this trade has earnings risk if held through then.
Cava Group is a fast-casual restaurant chain specializing in Mediterranean cuisine. It's known for its customizable meals and fresh ingredients.
After its IPO in 2023, the company gained attention for its rapid growth and focus on healthier food options in the competitive restaurant industry.
Revisiting McDonald's
This bullish diagonal trade on McDonald's performed beautifully and can be closed for a huge profit.
Always 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
