MRVL Stock Bullish Diagonal Trade Targets a Price of $125 by March 21st

A bullish diagonal spread is an advanced option trade and generally not suitable for beginners, but it can have its place within an option portfolio.

It is a bullish strategy that benefits from time decay.

The strategy involves buying a long-term call and selling a monthly out-of-the-money call against it.

The trade is best placed when the trader has a bullish outlook and thinks the stock could get to the short call strike by the first expiration date.

A rise in implied volatility will benefit the trade as it has positive Vega overall.

The big risk with the trade is a sharp move lower early in the trade.

Let’s look at an example using Marvell Technology (MRVL).

MRVL Stock Bullish Diagonal Example

Marvell Technology is in a solid uptrend and is rated a Strong Buy. The Barchart Technical Opinion rating is a 725% Buy with a Weakening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Let’s look at how we can use options to find a favorable risk to reward trade on the assumption that MRVL stock might rally to $125 in the next six to seven weeks.

We will look at a bullish diagonal spread which allows traders to get long MRVL without risking too much capital.

A bullish diagonal spread is a trade that involves buying a long-term call option and selling a shorter-term, further out-of-the-money call option.

Structuring the trade at $125 gives the trade around 37 delta, which is roughly equivalent to being long 37 shares of the stock.

Selling the March 21st $125-strike call option will generate around $480 in premium and buying the January 16th, $100-strike call will cost around $3,055.

That results in a net cost for the trade of $2,575 per spread, which is the most the trade can lose.

The estimated maximum profit is around $1,200, but that can vary depending on changes in implied volatility. The maximum profit would occur if MRVL closes right at $125 on March 21st.

The trade benefits from time decay as the short-term option will decay at a faster rate than the longer-term option.

The ideal scenario for this MRVL trade is for the stock to move towards $125 in the next few weeks.

A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t eventuate.

The suggested stop loss level is a close below $102.

Here is a visual of what the trade looks like:

Company Details

Marvell Technology is a fabless designer, developer and marketer of analog, mixed-signal and digital signal processing integrated circuits.

The company operates in Bermuda, China, Germany, Japan, Korea, Taiwan, the United Kingdom, and the United States.

Marvell specializes in highly integrated System-on-a-Chip (SoC) and System-in-a-Package (SiP) devices based primarily on ARM designs and sells to both enterprise and consumer customers.

It has a significant number of patents in design, software and reference platforms to its credit.

The company's product line includes application processors, controllers, switches, communications and networking processors and technologies, as well as other SoCs for printers and smart home products.

These serve two broad end markets - data center and enterprise networking.

MRVL rates as a Strong Buy according to 28 analysts with 2 Moderate Buy ratings and 2 Hold ratings.

Implied volatility is at 66.19% compared to a 12-month low of 35.22% and a 12-month high of 75.28%. 

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.