Nvidia Corporation’s (NASDAQ:NVDA) fell 12% in two days four points came on Thursday but the rest as a reaction to their earnings report. Even though management beat on all metrics, traders expected even more and they are now selling it down 8%.
This is not the first time NVDA stock gets punished. And on most of those occasions I shared ways to catch this falling knife but with caution. They were all winners and today I look to repeat performance.
The idea is to sell puts below support levels, which is where I’ll have to buy the shares if the trade fails. The upside of doing this is, however, is I can build a buffer just in case the selling persists.
Fundamentally, NVDA is not cheap. Its price-earnings ratio is four times that of Intel Corporation (NASDAQ:INTC) and twice the P/E of Microsoft Corporation (NASDAQ:MSFT). It runs similar margins, so the NVDA premium price is due to “hopium” of exciting things to come.
Technically, Nvidia stock performance has been awe inspiring rising almost 200% in 12 months. The stock has high-profile super fans and haters. Somewhere in the middle lies the truth.
So I am not going to set up trades requiring new highs to profit. Instead, I’m betting on NVDA stock soon finding footing. I do have to acknowledge the geopolitical risk with North Korea. But other than that if the macroeconomics hold then NVDA should continue to out-perform.
Click to Enlarge We are in a world increasingly dependent on tech at an exponential rate, and Nvidia is emerging as a leading supplier. It will prosper and traders will buy it.
The Bet: Sell the NVDA stock Dec $110 naked put and collect $2 to open. Here I have a 80% theoretical chance of price stabilizing above my strike. Otherwise I own the shares and suffer losses below $108.
Selling naked puts requires a lot of margins and can be daunting. To mitigate the risk I can sell spreads instead to accomplish the same goal.
The Alternate Bet: Sell the NVDA stock $115/$110 credit put spread where I have about the same odds of winning, which would deliver 12% in yield. This is much better than risking $150 to buy the stock at face value and hope it rallies back to highs.
Learn how to generate income from options here. 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.