Marvell Technology stock jumped recently following a strong earnings report.
Marvell is also showing a very low implied volatility rank, which means options are cheap compared to recent history. That could mean it's a better time to be an option buyer than an option seller.
Investors interested in taking some bullish exposure can do so with much lower risk by through a bull call spread.
A bull call spread 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 February expiration, a 130-strike call option was trading around $2.65, and the 135 call around $1.75.
Marvell Stock Potential Profit $410
Buying the 130 call and selling the 135 call would create a bull call spread. The trade cost would be $90 (the difference in the option prices multiplied by 100). The maximum potential profit would be $410 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy, so if Marvell closes below 130 on Feb. 21, the most the trade could lose is the roughly $90 premium paid.
Potential gains are also capped above 135. So no matter how high Marvell might go, the most the trade could profit is $410.
The breakeven price for the trade is equal to the long call strike plus the premium, which in this case is 130.90.
Managing Marvell Stock Trade
In terms of trade management, if the stock dropped below 100, or if the spread value dropped from $90 to $45, I would consider closing early for a loss.
According to the IBD Stock Checkup, Marvell stock is ranked No. 9 in its industry group. It has a Composite Rating of 81, an EPS Rating of 72 and a Relative Strength Rating of 94.
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 X/Twitter at @OptiontradinIQ
