Nvidia has been on fire lately, but could the market leader's epic rally need a little pause here? If so, traders may benefit from a diagonal call spread, an advanced options strategy, in Nvidia stock.
With the stock looking a little extended, Nvidia might rally a little further, but possibly not too much further. So, in situations like this I like to use a diagonal call spread because it utilizes options over two different expiration periods.
The ideal scenario here? Nvidia stock rallies up to just below the short (sold) call right before expiry.
Nvidia Stock Today: The Trade
It's fairly easy to set up this trade in Nvidia stock. First, sell the March 28-expiration call with a 970 strike price. Next, buy the April 12 1,000 call.
This diagonal spread trade would generate a cost of around $5, or $500 per set of contracts, based on recent trading.
As the trade is placed for a debit, a trader's maximum loss on the downside is equal to the premium paid, or around $500.
The maximum risk for this options trade in Nvidia stock lies on the upside. It equals the difference between the strikes plus the premium paid.
With the strikes being $30 apart, the risk on the upside totals $3,500.
There is a nice profit zone between around 825 and 1,050. One can estimate the maximum potential profit at around $3,600. But the catch is you don't want the Nvidia shares to get to that zone too quickly.
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Managing Risk
In terms of risk management, I would set a stop loss if Nvidia stock rallied up above 1,000. As an example, if that were to happen today, the trade might be down around $250.
Investors will be taking a keen interest in the Nvidia conference taking place in San Jose, Calif., this week.
Diagonal spreads are an advanced strategy and not recommended for beginner option traders.
According to IBD Stock Checkup, Nvidia stock ranks No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 98.
It's important to 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
