The stock market is on a strong uptrend, and DoorDash stock in particular is looking very strong.
A current member of Investor's Business Daily's Leaderboard, DoorDash is showing signs of accumulation as it sits above its 21-day and 50-day moving averages. It's clear the stock has formed a fairly bullish picture.
Investors interested in taking some bullish exposure can do so with much lower risk 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.
The Mechanics Of A Bull Call Spread
When buying 100 shares, an August 220-strike call option is trading around $12.20, and the August 230 call is around $8.60.
Buying the 220 call and selling the 230 call would create a bull call spread. The trade cost would be $360, or the difference in the option prices multiplied by 100. Thus, the maximum potential profit would be $640, or the difference in strike prices, multiplied by 100 less the premium paid.
A bull call spread is a risk defined strategy. That means if DoorDash stock closes below 220 on Aug. 15, the most the trade could lose is the roughly $360 premium paid. Potential gains are also capped above 230, so no matter how high DoorDash stock might go, the most the trade could profit is $640.
The breakeven price for the trade is equal to the long call strike plus the premium, which in this case would equal 223.20. In terms of trade management, if the stock dropped below 197, or if the spread value dropped from $360 to $180, it might be best to close early for a loss.
DoorDash Stock: No. 1 In Its Group
According to IBD Stock Checkup, DoorDash stock ranks No. 1 in its group and has a Composite Rating of 99, an Earnings Per Share Rating of 81 and a Relative Strength Rating of 94.
A recent example of a bull call spread in this column was Nvidia. With its strong earnings report released Wednesday, it looks like this bull put spread should be a great winner.
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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
