Long-Term Bull Put Spread Provides Opportunities for NVDA Bulls

Nvidia (NVDA) has had a nice bounce and appears to be back in investors good books.

NVDA stock is back above the 20-day moving average and appears primed to break above the 50-day line next.

COMPANY DETAILS

NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU.

Over the years, the company's focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms.

NVIDIA's GPU success can be attributed to its parallel processing capabilities supported by thousands of computing cores, which are necessary to run deep learning algorithms.

The company's GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.

NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role.

The company's partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.

NVDA BULL PUT SPREAD

Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.

Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.

As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Implied volatility is currently sitting at 63.71% which gives NVDA and IV Percentile of 90% and an IV Rank of 54%.

Keep in mind Nvidia is due to report earnings on August 28th.

When entering credit spreads such as a bull put spread, it’s better to look for a stock with a high implied volatility percentage.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

If we go out to December, we could sell the December 20 put with a strike price of $85 and buy the $80 put, which would create a bull put spread.

This spread was trading yesterday for around $0.80. That means a trader selling this spread would receive $800 in option premium and would have a maximum risk of $420.

That represents a 19% return on risk between now and December 20 if NVDA stock remains above $85.

If NVDA stock closes below $80 on the expiration date the trade loses the full $420.

The breakeven point for the bull put spread is $84.20 which is calculated as $85 less the $0.80 option premium per contract.

That breakeven price is around 28.7% below yesterday’s closing price. 

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $80, so we could set a stop loss equal to the premium received, or a loss of around $80.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the key level of $100.

Please 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.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.