Nvidia is not only trading above the 21-day exponential moving average and the 50-day line, but it has also experienced a powerful breakout past a 505.48 buy point in the last few days. Traders willing to bet that NVDA stock will stay above 510 for the next week or so could look at a bull put spread trade.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if the full-size position on IBD Leaderboard trades sideways or higher — and even sometimes if it trades slightly lower.
NVDA Stock Today: The Bull Put Spread Setup
NVDA stock traded around 549 during Thursday afternoon trading. So, if we use the Jan. 19 expiration, we can sell a put contract with a 510 strike price. Then, we can buy a 505 put for a net premium received of $0.40 per share for a set of contracts, based on recent trading.
Selling this spread would put $40 in a trader's pocket right now. Also, the trade has a maximum risk of $460.
If the spread expires worthless that would be an 8.7% return in 10 days, provided NVDA stock stays above 510 at expiration.
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Risk Vs. Reward
The maximum loss would occur if NVDA stock closes below 505 on Jan. 19. At that point, the premium seller would lose $460 on the trade.
The break-even point for the trade? We get 509.60, calculated by taking 510 less the $0.40 option premium per contract.
I would set a stop-loss if the loss is equal to the amount of premium received, which in this case would be $40.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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NVDA Stock Checkup
According to IBD Stock Checkup, NVDA stock ranks No. 1 in its group. It holds a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 97.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
