There are many of us watching the Nvidia train, thinking to ourselves, "OK, I just gotta wait for a pullback, then I will get in." But the train keeps skipping our station. With heavy hype and articles out there about the AI movement (indeed, this does seem to be the future) we only need to focus on the timing of entry to mitigate risk.
But how?
Enter the double butterfly — This trade was introduced with the First Solar trade on May 17. There, we saw quickly why exiting at the middle strike is so important as the stock rocketed into our call butterfly profit spaces.
Today we do the same thing with Nvidia stock. Our position gives us a shot at both the upside and the downside, which will be inexpensive and bind risk at the same time.
As we know, when we can have the ability for strong upside returns and hold risk in check, our probabilities suffer. This means that we must contain size in our decisions. Translation: Never bet the farm on butterflies.
The double butterfly consists of a butterfly trade using calls and another butterfly using puts. The trader can choose either of these sides based on personal opinion about the stock, or both.
Trade Structure For Nvidia Stock Butterfly
The long call butterfly spread at a debit of $4.70:
Buy to open 1 Jan. 17, 2025, 120 calls
Sell to open 2 Jan. 17, 2025, 150 calls
Buy to open 1 Jan. 17, 2025, 180 calls
The long put butterfly spread at a debit of $1.72:
Buy to open 1 Jan. 17, 2025, 116 puts
Sell to open 2 Jan. 17, 2025, 100 puts
Buy to open 1 Jan. 17, 2025, 83 puts
Total debit is $6.42, and that's the total risk.
The break-even cost for the stock sits near $126.42 on the call side and $109.58 on the put side. It's the cost of the position with reference to the first strike noted in each butterfly.
Remember, set a price alert for the short (middle) strikes to help you manage the risk and take profit. An alert set for each of the middle strikes will alert you to exit the position.
The ideal strategy result gives us four choices to exit the Nvidia stock trade:
- To sell the spread once it carries an acceptable profit — it is around 100% for me with butterflies.
- To sell the spread once the middle strike alert is triggered
- To sell the spread once it hits your loss threshold as determined by your own risk tolerance.
- To sell the spread into the week before expiration, if all is going well. (I've had many a trade go sideways, taking it down to the wire and not capturing gains.)
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools in Investors.com.
The goal of taking the double butterfly is to position in the likelihood of a stronger move over the next 60 days into the middle strike of our butterflies. We sell strikes further out to finance our position.
Trade Management And Key Chart Levels
The monthly resistance zone sits right around 195. Our goal, should prices continue to rise, is to take profits on the way up and reenter into downward spikes sure to come into the election cycle. The support sits near 100 — the breakaway price move at this familiar number.
Because the moves in Nvidia stock — which is in IBD Leaderboard — have been so strong, many are thinking it should take a breather. That's why I have positioned the short side of the trade as well. If the market gyrates, it is quite possible that both sides of this butterfly will make gains.
Scenarios For Nvidia Butterflies
- The stock sticks in a range and both butterflies erode to zero (set risk limits).
- The stock expands to the north and our call butterflies grow in value.
- The stock expands to the south and our put butterflies grow in value.
There is a sweet spot with butterflies at the middle strike, so pay attention to that particularly.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
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 X at @AnneMarieTrades
