In the past three weeks, AMD stock has beautifully resisted challenges of support near the 21-day moving average and looks primed for the next leg of the rally.
While there is no guarantee the rally will continue, a bull call spread is an easy, risk-defined strategy that will benefit from further upside in the stock.
AMD Stock: The Bull Call Spread Trade
How do you create a bull call spread?
Buy a call and then sell 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 Oct. 16-expiration contract, a 95 strike call option traded Monday around $6.50; a 100 call hovered near $5.00.
Buying the 95 call and selling the 100 call would create a bull call spread. The cost of the trade would be $150 and the maximum profit potential would be $350 (difference in strike prices less the premium paid).
An Upside Limit On The Profit
A bull call spread is a risk-defined strategy. So if AMD stock closes below 95 on Oct. 16, the most the trade could lose is the roughly $150 premium paid. Potential gains get capped above 100. So no matter how AMD stock might go, the most the trade could profit is $350.
Trading a bull call spread can be an easier way for smaller traders to gain a bullish exposure to AMD stock using options.
In terms of trade management, if the spread dropped from $1.50 to $0.75 I would consider closing early for a loss. Otherwise, I would hold to expiry or if the spread traded up near $3.00.
Always 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
YOU MIGHT ALSO LIKE:
This post was originally published on *this site*