Nvidia had a tough week, dropping 5.74% to $138.25, wiping out almost all of November's gains.
However, the stock is holding above the rising 50-day moving average and this could prove to be an excellent buying opportunity.
On Nov. 20, Nvidia once again beat the EPS estimate of 70 cents, coming in at 78 cents a share. Year-over-year, Nvidia's EPS was 111% higher and revenue was up 94% to $35.1 billion.
Investors interested in taking some bullish exposure can do so with much lower risk by through a bull call spread.
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.
Max Profit $595 On Nvidia Stock
Going out to the April expiration, a 140-strike call option was trading around $16.50, and the 150 call for around $12.45.
Buying the 140 call and selling the 150 call would create a bull call spread. The trade cost would be $405 (difference in the option prices multiplied by 100). The maximum potential profit would be $595 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy, so if Nvidia closes below 140 on April 17, the most the trade could lose is the roughly $405 premium paid.
Potential gains are also capped above 150. So no matter how high Nvidia might go, the most the trade could profit is $595.
The breakeven price for the trade is equal to the long call strike plus the premium, which in this case would equal 144.05.
How To Manage Nvidia Option Trade
In terms of trade management, if the stock dropped below 130, or if the spread value dropped from $405 to $20, I would consider closing early for a loss.
According to the IBD Stock Checkup, Nvidia is ranked No. 2 in its industry group. It has a Composite Rating of 96, an EPS Rating of 99 and a Relative Strength Rating of 95.
Our last bull put spread trade on Nvidia (Nov. 18) was a nice winner, and hopefully this one will be also.
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 X/Twitter at @OptiontradinIQ
