Call Debit spreads and using them with Nvidia, NVDA

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Hey all,

This is the Unusual Whales Team, and we are going to spend every Thursday walking you through some trades of the week for free to help your trading!

In today’s issue, we’re going to revisit the call debit spread multi-leg strategy. The example we’ll use is a well-timed multi-leg trade on Nvidia, $NVDA. This trader opened their spread, betting on the upside, near $NVDA lows, before a brief, but large, market-wide bounce following FOMC.

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I know we’ve covered this spread before, but this example was too clean to ignore. So, let’s start with a bit of a refresher. 

A Call Debit Spread is an options strategy where a trader anticipates a price increase with minimal to moderate volatility. To implement this, the trader buys one call contract to initiate a long position and sells a higher strike call to initiate a short position.(short).

This strategy enables the trader to capitalize on the expected price increase of the underlying stock while mitigating downside risk. The trader pays a premium for this position, but it's lower than what would be paid for a naked call. The short leg of the trade offers protection against losses. However, in return for this protection, the trader accepts a limited profit potential. The maximum profit is confined to the difference in price between the short leg sold to open and the long leg bought to open.

In the case of our example in $NVDA, the trader bought to open 34,000 contracts of the $115 call contract expiring on August 23, 2024. In conjunction with this, they sold to open 34,000 contracts of the $125 call contract of the same expiration. At the time of fills, $NVDA traded within a range between $105.80 and $106.12 per share.

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Remember, the cost of a call debit spread is the premium paid for the long leg MINUS the credit received for the short leg. After factoring in the average fills of each leg in this spread, the trader paid an average premium of $1.59 for each of the 34,000 spreads, bringing the total cost of this position to roughly $5.4 million. 

Above, we can see the point on July 30th, the day before the FOMC meeting and presser, where this spread opened, as well as the historic PnL of the spread. As we can see, this trader nearly bottom ticked the spread; it was opened at the lowest value point in the last 30 days.

On July 31st, FOMC took place wherein the US Federal Reserve announced a hold on current interest rates. Additionally, Chair Jerome Powell indicated the notion of rate cuts in September 2024 was on the table.

The market reaction was certainly to the upside. In the case of $NVDA, the stock price jumped dramatically from a low of $102.51 per share on July 30th, to reach as high as $118.33 in after hour trading on July 31st. The following morning, $NVDA climbed even higher to $120.14 per share.

This wide range of movement brought this trader’s call debit spread deep into profit. From their original average entry of $1.59 to a regular hours high of $4.28 per spread. 

At highs, the value of the trade went from $5.4 million to $14.55 million; a profit of $9,152,000!!

I hope this helped you identify call debit spreads, and see how you can utilize them to play the longside with more limited downside than naked calls!

Thank you as always for reading! Be on the lookout for more guides, walkthroughs, and Education on the Unusual Whales YouTube channel!

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NOTE: This post is not financial advice. The stock market is risky, and any trade or investment is expected to have some, or total, loss. Please do research before any trade. Do not use this information for investment decisions. Check terms on site for full terms. Agree to terms before considering this information.

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