In today's Flow Show, Steve Strazza and I discuss the "real" stock market and what's going on that isn't indicative of what the $QQQ or $SPY is telling us.
Are we setting up for a regime change? Or a change of character for this bull market?
Well, one of the stocks most likely to answer this question is Nvidia $NVDA.
Here's a one-year chart of $NVDA:
This isn't the type of setup that often gets me excited when I'm looking for a bullish bet.
However, large caps have been leading the charge into the end of the year. Will $NVDA finally play catchup? If it does, it could potentially cover a lot of ground in a hurry.
If it doesn't, well... this will be a very valuable clue as to how we need to proceed in the coming year.
So we're going to position for the rebound, putting juicy out-of-the-money call options to our advantage, while defining our risk in case $NVDA would rather yield us information than profits.
Here's the Play:
I like buying a $NVDA March 140/180 Bull Call Spread for an approximately $8.00 net debit. This means I'll be long the March 140 calls and short an equal amount of the March 180 calls:
I'm going to keep a tight stop on this position. If $NVDA can't dig in and hold the $125 level, then I'm going to close the trade and move on, booking what should be a manageable loss.
In the meantime, I'll exit this $NVDA position for a profit in one of two possible scenarios:
If $NVDA trades north of my short call strike ($180), I'll book the profit, whatever it is (it could be as high as 4x what we paid for it!)
I'll leave a resting GTC limit order to sell the spread at $32.00. That represents 80% of the potential full value of the spread. If I get there, that's good enough. No need to risk it all for those extra few nickels.
P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910.
Sean McLaughlin | Chief Options Strategist, All Star Charts
