Despite a hot performance in 2016, Nvidia Corporation (NASDAQ:NVDA) can’t seem to find its feet so far this year. The company is still as hot as ever, riding both the VR boom and the ever expanding Internet of Things (IoT) trend. NVDA stock, however, continues to battle volatile market headwinds over the short term.
Click to Enlarge For instance, Tuesday’s selloff smacked Nvidia stock for a loss of more than 3%, pushing the shares below support at their 50-day moving average and threatening key short-term support at $105.
That said, NVDA shares are still up more than 11% from their March bottom near $95 and have pulled their 10-day and 20-day moving averages into a bullish cross. Market willing, the longer-term trend for NVDA stock remains to the upside.
With Nvidia maintaining a strong market presence in the IoT, and rising growth prospects from strong Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch sales, it’s no surprise that NVDA stock remains a favorite among Wall Street analysts.
Specifically, Thomson/First Call reports that 19 of the 35 brokerage firms following Nvidia rate the shares a “buy” or better. The 12-month price target rests a bit low, however, at $113.59 and could use a bump or two to be more in line with the company’s longer-term potential.
As a case in point, analyst B. Riley recently noted that Nvidia doesn’t quite get the attention it deserves. While most of Wall Street is focused on the company’s gaming division, Nvidia has massive market potential in the IoT with its “Xavier” chipset, especially after inking a supply deal with leading automotive parts supplier Bosch. “We believe Xavier’s power and performance could lead the industry for years to come,” B. Riley wrote.
The problem is how to get in on this longer-term uptrend for NVDA stock while mitigating the short-term risk of a continued Trump-trade collapse. This is where NVDA options come in.
2 Trades for NVDA Stock
Put Sell: The easiest way to acquire NVDA stock at a price point that satisfies your portfolio’s risk profile is to sell out-of-the-money put options. Regular readers know that I usually utilize this strategy to capture premium on stagnant stocks, but you can also use put sells to essentially name the price you want to pay for a stock.
Assuming you expect more market downside for NVDA, you could sell a short-term put at the strike you wish to buy and wait for the shares to pullback. Let’s say you expect more heavy market selling, but like NVDA stock at $100. In this case, you would sell to open an April $100 put, currently bid at $1.50, or $150 per contract.
That’s it. You sell the April $100 put, collect the premium, and wait. And if NVDA doesn’t hit your target, you roll the put out to the May series, rinse, repeat and get paid.
Married Put: The only downside to the put sell strategy when looking to acquire NVDA stock is that the shares may never actually hit your target. In this case, if you really want to own NVDA stock, you have to buy the shares, incurring the risk that stock could fall further in the current market environment.
But you can use NVDA options as a kind of insurance against these losses by using a strategy called a “married put.” A married put involves purchasing an at-the-money or out-of-the-money NVDA put for every 100 shares purchased.
The strike of the purchased put should reflect your risk tolerance — i.e., an at-the-money $105 put offers full protection, with losses limited to the cost of the put and brokerage fees, while an out-of-the-money $100 or $95 put would allow for NVDA stock to test support levels before the insurance kicked in.
For an intermediate level of support, we’ll go with an NVDA April $100 married put as an example. In this trade you would buy 100 shares of NVDA stock (currently trading for about $105.40 per share) while simultaneously purchasing one April $100 put, which, at last check, was asked for $1.53, or $153 per contract.
In the end, the total cost for your option position would be $153, while the stock position would total about $10,540 — excluding brokerage fees. If NVDA stock closes below $100 per share when April options expire, you would be able to exit the position and avoid any additional losses by exercising the April $100 put.
Finally, if NVDA stock holds above $100 through April expiration, you can roll the $100 put forward (or upward to $105) into May or June if you feel you still need the protection.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
