KBR stock was Friday's IBD Stock of the Day and currently has a 50.09 buy point and a rapidly improving relative strength line.
KBR stock is above all key moving averages and attempting a breakout. The stock is forming a cup base and climbed to its buy point this morning.
Long Call Option Minimizes Risk On KBR Stock
Investors who think KBR stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright. This can be a good way to protect precious capital in this volatile market.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of KBR stock, he or she would have to invest around $4,800 at Friday's price.
Similar Exposure With Lower Cost
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If an investor were to buy one KBR 50 call option expiring on June 17, they would only need to invest around $280 rather than $5,000 if they bought the stocks outright.
The break-even price for this call option is equal to the strike price plus the premium paid. That would make the break-even price 52.80.
The most the trade can lose is the premium paid of $280, which would occur if KBR finished below 50 on June 17.
However, if KBR stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call. That turns the trade into a bull call spread.
For example, selling the June 17, 55 call on KBR stock would reduce the trade cost by around $110. But it would also limit the upside above 55.
Earnings For KBR Stock In May
KBR is set to announce earnings around the end of May. So this trade would have earnings risk if held to expiration.
Additionally, KBR stock is ranked number 1 in its group and has a Composite Rating of 95, an EPS Rating of 91 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 Twitter at @OptiontradinIQ
