Trading Idea: Lam Research Corporation (LRCX) Debit Spread

In a fitting bookend to today’s trading idea on NVIDIA Corporation (NVDA), we have another potential debit-spread trade on another semiconductor company, Lam Research Corporation (LRCX).

This options trading idea from the exclusive ONN Idea Generating Platform is for moderately bullish investors with a short-to-intermediate-term horizon. A debit spread, also known as a bull call spread, is the purchase of one call that is closer-to-the-money and the simultaneous sale of a higher-strike call. The investor naturally pays more for the closer-to-the-money position, resulting in a net debit at the time of the trade’s execution.

LRCX Debit Spread Trade Detail
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

LRCX is trading at $27.36 today, up nearly 1.5% against the backdrop of a declining technology market.

Debit Spread/Vertical Call Spread -

• Sell one September 35 call (out-of-the-money by 27.9%) for $0.30 (bid price)
• Buy one September 30 call (out-of-the-money by 9.6%) for $1.35 (ask price)
• Net debit of $1.05

In this example, the investor sold the 35-strike call at the bid price and purchased the 30-strike call at the ask price. When trading a spread in the real world, however, it is sometimes possible to secure better pricing on at least one of the legs by establishing a limit order and hoping to buy (or sell) this leg closer to the midway point between the bid and the ask.

Profit/Loss Details:

The maximum risk for this spread is $1.05 per contract, or the debit paid at the time of the trade. This typically occurs if both options expire out-of-the-money (with LRCX trading below 30). At this point, the $1.35 paid to buy the 30 call is offset by the $0.30 collected through the sold call.

The maximum profit is the difference between strike prices minus the debit, or $3.95 in this example. This represents a profit of 276% off the initial investment of $1.05 (minus commissions). With a debit spread strategy, maximum profit is achieved if the underlying stock is trading above both strike prices at expiration. LRCX would need to be above the 35 strike at September expiration for this example’s investor to gain maximum profit. With LRCX trading above 35, the investor can exercise the purchased call, buy the stock at its lower strike price (30) and sell that stock at the higher strike price (35), booking a solid profit in just about two-and-a-half months.

The breakeven price for this trade is $31.05, or the strike price of the purchased call plus the debit paid. LRCX is currently trading 13.5% from this level.

If the stock is trading between 30 and 35 at expiration, the long call (the 30 strike) will be in-the-money and worth its intrinsic value, while the written call will have no value.

If you prefer covered calls, credit spreads, iron condors, or other option-trading strategies, be sure to keep an eye on the ONN Idea Generating Platform for additional stock option trading ideas.