After the close of trading last night, NVIDIA Corp. reported a third-quarter profit of $107.58 million, or 19 cents per share, compared with a profit of $61.75 million, or 11 cents per share, for the year-earlier period. The company blew past the consensus estimate, and guided higher for the fourth quarter. Following the report, NVDA shares jumped nearly 6% higher in after-hours trading, and the stock has added to this lead in today's trading, advancing nearly 7% before noon.

As you would expect, options activity has spiked on NVDA in today's trading, especially on the call front. More than 29,000 of these bullishly oriented contracts have changed hands, according to our Intraday Volume Explosion List. In particular, options traders are focused on the November 13 and 12 calls, with the former accounting for more than 8,000 contracts of the stock's total call volume.

Surprisingly, a majority of the call volume trading on NVDA's November 13 strike appears to be crossing at the bid price. While digging through this activity, I ran across a block of 700 NVDA November 13 calls which were marked "spread." This block traded at 9:51 a.m. Eastern time on the International Securities Exchange (ISE), for the bid price of $0.52. The second half of this spread took place on NVDA' November 12 call, where 700 contracts traded at the same time on the same exchange for the ask price of $1.16. This block was also marked "spread." Given this data, it would appear that we are looking at a vertical call spread, more commonly known as a debit spread, on NVIDIA Corp. This options strategy is also known as a long call spread, or a bull call spread.

The Anatomy of an NVIDIA Corp. Vertical Call Spread

Breaking down this potential debit spread position, the trader purchased 700 November 12 calls for the ask price of $1.16, resulting in a total debit of $81,200 -- (1.16 * 100) * 700 = $81,200. Minus the sold leg of the debit spread, NVDA would need to rally about 7.25%, from Thursday's close, to $13.16 per share in order for the position to reach breakeven at expiration. Furthermore, the maximum loss on this position is limited to the initial investment of $81,200.

However, the second leg of the debit spread helps to offset the cost of the overall position. Specifically, the trader sold 700 November 13 calls for the bid price of $0.52, netting a total credit of $36,400 -- (0.52 * 100) * 700 = $36,400. Combining this leg of the trade with the purchased November 12 call lowers the total cost of the entire position to $44,800 -- $81,200 - $36,400 = $44,800.

The addition of the sold November 13 call also lowers breakeven on the trade. To arrive at breakeven, we subtract the credit received from the sold November 13 call from the debit incurred by purchasing the November 12 call. We arrive at a cost of $0.64, or $64 per contract. As a result, the trader now needs NVDA to rally roughly 3% to $12.64, from Thursday's close, in order to recoup the initial investment on the entire position. At last check, NVDA was up 7.13%, meaning that the trader is already sitting on a profit.

The maximum profit is calculated by subtracting the premium paid from the difference between the two strikes, and is reached if NVDA rallies to $13 per share at expiration. In this case, the maximum profit is $0.36 -- (13 - 12) - 0.64 = $0.36 -- or $36 per contract. The maximum loss is equal to the net debit of $0.64, or $64 per contract. Below is a chart for a rough visual representation of the trade's profit/loss scenario:

Implied Volatility

After the vertical call spread has been entered, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. [Correction: The following wording was updated for clarity.] As of yesterday's close, implieds for the November 12 call arrived at 61%, while the implied volatility for the November 13 call rested at 62%. NVDA's one-month historical volatility came in at 28.14%.