NVDA Option Trade Could Unlock a 36% Annualized Profit

Nvidia (NVDA) stock continues to show incredible strength, and since the stock split, it provides more opportunities for option traders. 

The stock split has made Nvidia shares more accessible, allowing a wider range of investors to participate. 

Selling puts on NVDA stock previously required significant amounts of capital, which limited the ability of smaller traders to engage. 

Now, we can sell puts with far less capital requirements, opening up new strategies and potential profits for a broader audience of traders.

NVDA Option Combination Trade

By using a combination of option strategies, we could potentially buy the stock for a significant discount, or achieve a healthy profit if the stock trades sideways.

Here’s the trade:

Sell to open the NVDA July 19 put with a strike price of $115, which was trading around $3.60 yesterday.

Then, add a bear call spread:

Sell to open the NVDA July 19 call with a strike price of $140, which was trading around $1.35 yesterday.

Buy to open the NVDA July 19 call with a strike price of $144, which was trading around $0.95 yesterday.

The sold put brings in around $360 in option premium, and the bear call spread adds another $40 in premium. In total, the combination of the two trades generates $400 in premium.

Here’s how the trade looks at trade initiation. The blue line represents the profit or loss at expiration and the purple line shows the trade as of today.

The position starts with a delta of 28, meaning it is roughly equivalent to owning 28 shares of NVDA stock. This figure will change as the trade progresses.

This is how the trade could look in around three week’s time.

Possible Scenarios For This NVDA Stock Option Trade

Let’s work through a couple of scenarios of how this trade could look at expiration on July 19.

- If NVDA stock trades sideways and finishes between $115 and $140, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $400.

- IF NVDA falls below $115 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at $115. However, our net cost basis will be $111, thanks to the $400 in option premium received. That is 8.2% below the closing price on Tuesday.

- If NVDA rallies above $144, the bear call spread will suffer a full loss of $400, but this will be fully offset by the $400 premium received, leaving the trade with a flat return.

As you can see, there is no risk on the upside.

Company Details

The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

The market is approaching overbought territory. Be watchful of a trend reversal.

Of 40 analysts covering NVDA stock, 35 have a Strong Buy rating, 2 have a Moderate Buy rating and 3 have a Hold rating.

Implied volatility is 41.45% compared to a twelve-month high of 68.21% and a low of 32.04%. That gives NVDA stock an IV Percentile of 32% and an IV Rank of 26.01%.

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.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own.

If you end up being assigned, you can start selling covered calls against the stock position.

You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.

Some traders like to add a deep out-of-the-money long put to reduce risk. For example, a July 19 put option with a strike price of $100 could be purchased for around $69. Buying this put, would cap losses below $100 and reduce total capital at risk.

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.