Copyright Investor's Business Daily
Robinhood Markets (HOOD) stock is undergoing a healthy pullback toward its 50-day moving average and looks primed to revisit its 2025 high, a little past 150. Investors who think Robinhood stock will continue to rally could do so in a reduced risk way, with the use of options. Here's a look at how to use options to find a favorable risk to reward trade on the assumption that Robinhood stock might move toward 150 in the next few weeks. Investors might consider a bullish diagonal spread which allows traders to get long on Robinhood without risking too much capital. A bullish diagonal spread is a trade that involves buying a long-term call option and selling a shorter-term, out-of-the-money call option against it. We're looking for a controlled move higher over the next few weeks. Not a massive surge, but steady bullish action that allows the short call to decay while the long call retains value. How To Play The Diagonal Spread Buying a Dec. 19, 130-strike call will cost around $1,865 and selling the Nov. 21, 150-strike call option will generate around $645 in premium. That results in a net cost for the trade of $1,220 per spread. That's also the most the trade can lose. The estimated maximum profit is estimated at around $1,200, but that can vary depending on changes in implied volatility. The maximum profit would occur if Robinhood stock closed right at 150 on Nov. 21. The idea with the trade is that if Robinhood stock trades up to around 150, the diagonal spread will increase, resulting in a net profit. A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't come to pass. The combined position has a net delta of 26. That means the trade is roughly equivalent to owning 26 shares of Robinhood stock. But this will change as the trade progresses. Also, the suggested stop-loss level is a close below a price of 125. Earnings Risk For Robinhood Stock Robinhood is due to report earnings on Nov. 5, so this trade would have earnings risk if held through that date. Investor's Business Daily gives Robinhood stock a Composite Rating of 98 out of a best-possible 99, an Earnings Per Share Rating of 80 and a Relative Strength Rating of 98. According to IBD Stock Checkup, Robinhood also ranks first in the Finance-Investment Banking/Brokers group. Further, the group ranks 46th out of the 197 industries covered by IBD. It's important to 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ. YOU MIGHT ALSO LIKE: Walmart Stock: This May Be The Best Defense As Markets Face Pressure Meta Stock: An Advanced Put Strategy Takes Advantage Of Pre-Earnings Volatility Strategy's Falling Stock Price Can Produce Profit Using A Bear Call Spread
