Nvidia Stock Rising Again? Profit With This Defined Risk Option Trade | IBD | Summary and Q&A

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October 5, 2022
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Investor's Business Daily
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Nvidia Stock Rising Again? Profit With This Defined Risk Option Trade | IBD

TL;DR

Learn how to set up a bullish option trade called a bull call spread for chipmaker Nvidia, which has been on the decline since November 2021 but shows signs of potential improvement and institutional support.

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Questions & Answers

Q: What is a bull call spread?

A bull call spread is an option strategy where an investor buys a call option with a lower strike price and sells a call option with a higher strike price, creating a spread with a defined range of potential profit or loss.

Q: How does a bull call spread profit and lose?

A bull call spread profits if the stock price at expiration is above or at the short strike price. Max loss is the debit paid upfront if the stock price is at or below the long call strike price.

Q: What are the potential gains and losses in a bull call spread?

The maximum potential gain is the difference between the width of the spread and the premium paid. The maximum loss is the premium paid upfront.

Q: What should traders consider in trade management for a bull call spread?

If the stock drops below a certain level (e.g., 120 in this case), it may be prudent to consider closing the trade early for a loss. Traders with bearish views on Nvidia should avoid entering this trade.

Summary & Key Takeaways

  • Nvidia stock is below its key moving averages but shows resistance at its 21-day exponential moving average. Breaking above this level would be positive for the stock.

  • A bull call spread is a risk-defined option strategy that can be used when expecting the underlying stock price to rise.

  • The investor buys a call option with a lower strike price and sells a call option with a higher strike price, creating a spread with a defined range of potential profit or loss.

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