The shares of Nvidia (NVDA) have been tearing up the charts in 2011, thanks to a lucrative settlement with Intel (INTC) and a high-profile new partnership with ARM Holdings (ARMH). The month of January isn't quite half-over yet, but the stock is already sitting on a year-to-date gain of 51.6%.
Judging by at least one headline hitting the wires, the stock's rapid rise is making some analysts nervous. However, on Wednesday, one upbeat options trader placed a bet on additional upside from NVDA during the near term.
Specifically, the trader constructed a long call spread by purchasing 1,000 contracts of the February 22 call, and simultaneously selling 1,000 contracts of the February 25 call. This spread was initiated for a net debit of $1.15 per pair of contracts, which also represents the speculator's maximum potential loss on the play.
So, even if NVDA should tumble to zero during the next month, this spread strategist won't swallow too great a loss. However, if the stock should extend its surge higher, the trader can collect some respectable profits. The maximum potential gain is equal to the difference between the two strike prices, less the initial net debit -- in this case, $1.85 per pair of contracts.
In the best-case scenario, NVDA would settle right at $25 upon February expiration. This would allow the trader to collect the maximum gain on the purchased calls, while the sold calls could be left to expire worthless.
NVDA is cooling its heels, as the shares are down about 2% at last look. With the equity's Relative Strength Index (RSI) perched at 86 -- firmly in overbought territory -- it wouldn't be too surprising to see the shares pull back toward support in the $19 or $20 neighborhood during the short term. However, with more than five weeks until February expiration, there's still plenty of time for our call spread strategist's bullish expectations to play out.
Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research.