This year has been friendly to bulls, but few were luckier than Nvidia Corporation (NASDAQ:NVDA). While I see upside technical potential in the likes of Apple Inc. (NASDAQ:AAPL), traders have been buying NVDA stock as if it’s going to run out of supply.
Click to Enlarge I am not one to chase “hopium,” however.
My puzzlement lies in the fact that the whole market got NVDA valuation so wrong up until just recently. Eleven months ago, Nvidia was around $30; now, even with a 5%-plus decline today, it’s over $110 per share.
This is a mind-blowing misjudgment of value, and I think the truth lies somewhere in the middle.
I know I won’t win any popularity contests by writing this. Understand that I’m not knocking Nvidia the company. I’m just saying there is something so wrong with the steepness of this rally in NVDA stock.
I will cautiously set a bearish trade with finite risk. Think of it as the definition of a calculated risk.
How to Short NVDA Stock for Free
The Bet: Buy the NVDA Mar $110/$105 debit put spread — a bearish trade — for $2.20 per contract. This is my maximum risk. I stand to double my money if NVDA stock falls below my spread.
For those who want to make it a true lotto ticket, buy the put spread much lower than current levels. The Mar $95/$90 debit put spread only costs $1.20 per contract. Because it’s lower, it’s less likely to win … but your reward would be greater.
I always like to limit my risk. In this case, I want to sell bullish risk to finance the purchase of the March put spread. (I told you I wasn’t dissing the company.)
By selling bullish risk in Nvidia stock, I make this a thread-the-needle trade.
The Bank: Sell NVDA Jun $75/$70 credit put spreads — a bullish trade — for 80 cents per contract. If successful, this trade yields 20% on money risked with an 85% theoretical chance of success.
If I take both trades, I need Nvidia to fall below my March debit put spread. But I also need it to stabilize before it reaches my longer-dated sold spread through mid June.
I will delay deploying the “Bank” trade as I may not even need it if NVDA stock starts the descent soon.
I am not obliged to hold these trades through expiration. I can close them for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
