Nvidia Corporation (NASDAQ:NVDA) is not an easy stock to short. NVDA stock has been on a monstrous run for a while. That’s because we live in a tech-driven world, and more aspects of our lives are becoming completely tech-dependent — big drivers for this chip company.
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Want proof of how ubiquitous this trend is? We’re talking about self-driving cars going into mainstream use within just a few years.
Nvidia, and chip titans Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD), are among the very few companies who supply the brains for this new techie globe. So for the long-term, shorting NVDA stock should turn out to be a bad idea. Many have tried to short it and lost. Last December, I actually shared a profitable bearish article on how to short NVDA stock for free — a rare winner on the bear side of things.
Today, amid what is a huge dip in Nvidia stock, I want to set a longer-dated trade that bets NVDA will not, in fact, collapse.
The thesis here is that the fundamentals are solid enough that they will invite buyers to defend the stock on dips. Technically, I see potential risk down to $90 per share. But luckily, the options markets are flexible enough to allow for trades with apt buffer zones.
Thanks to contracts dispersion, I can bend time and put it to work in my favor by selling risk against levels I deem safe.
How to Trade NVDA Stock Here
The Bet: Sell the NVDA Sep $70/$65 credit put spread for 85 cents per contract to open. The 30% buffer from current price gives this trade an 80% theoretical chance of success based on today’s metrics. If successful, this trade yields over 15% on money risked.
The Alternate Bet: A more aggressive trader can sell NVDA $65 put naked and collect $1.50 per contract. But by selling naked puts, I commit to owning the stock at that price if Nvidia stock falls through it.
Usually I like to hedge my trades, but in this case I will refrain for now. I believe that the longer-dated aspect of this trade allows me the flexibility to manage the risk appropriately should more downside come. Defense strategies could include credit call spreads or cheap shorter-term debit put spreads.
Conversely, someone who wants to be more bullish NVDA stock can use the proceeds from selling the credit put spreads to set another bullish trade.
The Juice (Optional): So, for example, I could buy the NVDA May $115/$120 debit call spread for 95 cents per contract to open. If Nvidia retests its highs, I stand to gain up to $4 per contract.
I am not required to hold my NVDA options trades open through expiration. I can close any of them at any time for partial gains or losses.
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.