The semiconductor industry continues to provide excellent opportunities for income generation with a backdrop of increased volatility and grinding upward trend.
With positive flow in both stocks in the technology sector and options making more bullish bets, it's the ideal time to take a look at the behemoth that is Nvidia. The chip stock holds both price strength and a bit of a cult following.
As the markets deliver wild swings, looking for spiked volatility and significant premium sent me positioning into a short iron condor expiring in May.
Nvidia Stock Iron Condor Setup
The trade is a short iron condor, which is made up of a short call spread and a short put spread. It aims at a specific price region over a period of time.
- Sell to open the Nvidia May 19 monthly 290 calls, and buy to open the Nvidia May 19 monthly 295 calls.
- Sell to open the Nvidia May 19 monthly 245 puts, and buy to open the May 19 monthly 240 puts.
The total credit is $2.95, and the total risk is $2.05. The total spread between strikes is $5.
Sitting with a Composite Rating of 98, Nvidia ranks weaker than the strongest in the industry, such as Broadcom and Lattice Semiconductor.
But the option chains are very active and provide an excellent space to sell time premium, which is the goal of this short iron condor.
The weekly chart shows a solid upward trend, with some measure of resistance at the levels near 290. Current prices show some brief sideways formations.
This option strategy works well when volatility is increased in the option chains relative to past times, and when we have a likelihood of a stall into prior resistance levels.
The break-even prices are $292.95 on the upside and $242.05 on the downside.
Trade Exploration & Rationale For Decision
Identify the key chart levels.
There's congestion between the 245 and 290 price levels.
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Scenarios For Nvidia Options Trade
What could happen:
- The stock moves within the range of congestion noted above into the expiration week and we collect full profit.
- The stock moves into our 50% profit line — when the position is worth around $1.475 — and we exit the trade.
- The stock rallies and moves over 295 with volume for more than three days. This means we must exit because the chart is in a breakout.
- The stock rallies and moves below 245 with volume for more than three days. This means we must exit because the chart is in a breakdown.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
