How to take advantage of this rising stock with reduced risk

Robinhood MarketsHOOD is near a buy zone and has had a great run in recent weeks. Investors who think Robinhood stock will continue to rally could do so with reduced risk by using options. Let's take a look at how we can use options to find a favorable risk-to-reward trade on the assumption that Robinhood stock might move towards 130 to 140 in the next few weeks. We will look at a bullish diagonal spread that 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. Buying the Dec. 18-expiring call with a 110 strike price will cost around $2,400, based on recent trading. Selling the Oct. 16 call at 130 recently generated around $740 in premium. That results in a net cost for the trade of $1,660 per spread, which is the most the trade can lose. The estimated maximum profit in the short term is around $960, but that can vary depending on changes in implied volatility. The maximum profit would occur if Robinhood Markets closed right at 130 on Oct. 16. The idea with the trade is that if Robinhood Markets stock trades up to around 130, 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, which means the trade is roughly equivalent to owning 26 shares of Robinhood stock. But this will change as the trade progresses. The suggested stop-loss level is a close below a price of 112. Robinhood is due to report earnings on or around Nov. 4, so this trade should not have any earnings risk. Investor's Business Daily gives Robinhood stock a Composite Rating of 91 out of a best-possible 99, an Earnings Per Share Rating of 36 and a Relative Strength Rating of 87. According to IBD Stock Checkup, Robinhood Markets ranks sixth in the Finance-Investment Banks/Bankers group. That group ranks 15th out of the 142 industries covered by IBD. Robinhood Markets is best known for its commission-free trading app offering stocks, options, exchange traded funds, and cryptocurrencies. It also has expanded into retirement accounts, a subscription-based gold tier, and crypto services. 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 master's 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: After A Microsoft Stock Price Spike, An Options Strategy Aims For A Robust Profit In Weeks Bullish Option Traders Might Like This Play On Dell Stock This Apple Trade Captures Profit In Either Direction The iPhone Maker's Stock Flies A Disney Strangle Strategy Can Profit From Big Swings By The Entertainment Stock Investors Can Tap This Spread On Mastercard; Stock In Buy Zone