The market just entered a power trend, and Arm Holdings stock is hovering around its 200-day moving average.
The stock is showing signs of accumulation, and the 50-day moving average is also starting to turn upward. All of that combines to form a fairly bullish picture.
Investors interested in taking some bullish exposure can do so with much lower risk through a bull call spread.
Setting Sights On August Options
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.
An August 135-strike call option is trading around $13.85, and the August 140 call is around $11.85. Buying the 135 call and selling the 140 call creates a bull call spread. The trade cost would be $200 — the difference in the option prices multiplied by 100 — and the maximum potential profit would be $300. The latter is the difference in strike prices, multiplied by 100 less the premium paid.
A bull call spread is a risk defined strategy, so if Arm Holdings stock closes below 135 on Aug. 15, the most the trade could lose is the roughly $200 premium paid.
Potential gains are also capped above 140, so no matter how high Arm Holdings stock might go, the most the trade could profit is $300.
The breakeven price for the trade is equal to the long call strike plus the premium, which in this case would equal 137.
In terms of trade management, the stock has been getting support in the last week around 128. If the stock dropped too much below that without recovering, or if the spread value dropped from $200 to $100, I would consider closing early for a loss.
Stock Checkup On Arm Holdings
According to the IBD Stock Checkup, Arm Holdings stock is ranks No. 7 in its group and has a Composite Rating of 91, an EPS Rating of 99 and a Relative Strength Rating of 60.
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. He is 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
