2012 has entered with a bang.  With the New Year not even a full three weeks old, the Nasdaq is already up an impressive 6.2%.  Momentum stocks have returned in an attempt to lead Mr. Market higher… and so far, they’ve been quite successful.

One such high-flyer of days past that looks to be stepping higher is Crocs Inc. (NASDAQ:CROX).  After surprising investors with disappointing earnings news last October, the shoe manufacturer has languished in the land of sideways chop for the past quarter.

Fortunately, news that the company expects its annual revenue for fiscal year 2011 to top $1 billion propelled the stock back into an uptrend last week, and CROX looks poised to continue its upward trajectory.

Source:  MachTrader

Traders looking for a limited risk play to exploit a continued run in CROX should consider purchasing a vertical call spread.

Don’t get caught up in the terminology – this is a simple options trade that’s easy to make.

The vertical call spread, sometimes referred to as a bull-call spread, consists of “buying to open” a lower-strike call option and “selling to open” a higher-strike call in the same expiration month.  The maximum risk is limited to the debit you pay at the time you make the trade, and your max reward is limited to the distance between strikes minus the net debit.

One way to play Crocs is to buy the CROX March 19 Call and sell the CROX March 21 Call for a net debit of 80 cents ($80 per contract). Prices that work right now are buying the $19 calls for $1.70 and selling the $21 calls for 90 cents.

The risk is limited to the initial $80 paid (80 cents x 100), and the max reward is limited to the distance between strikes ($21 – $19) minus the debit, or $1.20 per share ($120 per contract).

CROX is set to report earnings on Feb. 20, so if you’re unwilling to roll the dice on earnings, be sure to exit the trade beforehand.

At the time of this writing Tyler Craig had no positions on CROX.