Upstart (UPST) is one of the strongest stocks in the market right now, rising about 14% this week as it made a new high Thursday.
Upstart stock is highly rated, with a Composite Rating of 99 and a Relative Strength Rating of 99. Its EPS Rating of 65 is low for a growth stock, and is partly due to an uneven profit performance over the past eight quarters. The consumer lender was added to IBD Leaderboard Thursday.
With the market in a correction, it is risker to go all in on stocks, even if they are showing excellent relative strength.
One way to get long on Upstart stock while risking less capital is by using options.
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Setting Up Calendar Spread For Upstart Stock
Traders with a price target of 380 could place the bullish calendar spread at that price.
Selling the Oct. 29-expiring, 380-strike call option will generate around $760 in premium, and buying the Nov. 19, 380-strike call will cost around $2,110.
That results in a net cost for the trade of $1,350 per spread, which is the most the trade can lose.
The estimated maximum profit is around $1,550, but that can vary depending on changes in implied volatility.
The idea with the trade is that if UPST stock trades up to around 380, the calendar spread will increase, resulting in a net profit.
A bullish calendar spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t eventuate.
Implied Volatility Can Affect Profit
The ideal scenario is a rise up to 380 around Oct. 29 with little change (or a rise) in implied volatility.
The combined position has a net delta of 13, which means the trade is roughly equivalent to owning 13 shares of UPST stock, although this will change as the trade progresses.
For a trade such as this, I would set a profit target of 30% and a stop loss of 20%.
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
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