Amazon.com is putting in a nice series of higher highs above rising 21- and 50-day moving averages.
With the tech sector looking particularly strong, today we're looking at a bull call spread on Amazon stock.
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 August expiration, a 125-strike call option was trading around $6.45 on Friday, and the 130 call was around $4.55.
Maximum Profit $310 On Spread Trade
Buying the 125 call and selling the 130 call would create a bull call spread. The trade cost would be $190 (the difference in the option prices multiplied by 100). The maximum potential profit would be $310 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if Amazon stock closes below 125 on Aug. 18, the most the trade could lose is the roughly $190 premium paid.
Potential gains are also capped above 130. So no matter how high Amazon stock might go, the most the trade could profit is $310.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 126.90.
When To Cut Losses On Amazon Stock Trade
In terms of trade management, if the stock dropped below 113, I would consider closing early for a loss.
According to the IBD Stock Checkup, Amazon stock is ranked No. in its industry group and has a Composite Rating of 80, an EPS Rating of 42 and a Relative Strength Rating of 90.
A bull call spread trade on Broadcom discussed May 15 worked well and can be closed for almost the full profit.
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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
