Nvidia Corporation (NASDAQ:NVDA) has had an amazing year. Yes, it has had a difficult week on a few bad mentions, but this doesn’t change the long-term outlook.
Fundamentally Nvidia stock’s prospects remain unchanged. We are living in a world that is getting more dependent on tech. Machines will eventually run every aspect of our lives, and NVDA is one of few suppliers to the brains of these machines. Just because an analyst says it’s expensive, it doesn’t change that fact.
Click to Enlarge Technically, NVDA stock is approaching a zone that has served as a bounce level for the past few months. So unless the fundamentals change, investors usually repeat the process and buy the same levels.
I am a fundamental trader but a conservative one, so I won’t risk $101 to buy Nvidia stock. Instead, I will use options so I can risk little for a chance to create income.
How to Trade NVDA Stock Here
The Bet: Buy the Nvidia Jun $105/$110 debit call spread for $1.50 or better per contract. This is my maximum potential loss. I need NVDA stock to rally past my spread by mid June for a chance to triple my money. A more aggressive trader could buy the $110 calls naked for $3.50 per contract.
Usually I like to hedge my risk by selling opposing risk. But in this case, NVDA has proven it can rally against logic and for a long time, so I will refrain from selling calls against it. Instead, I will sell downside risk against proven support to eliminate my out-of-pocket expense.
The Hedge: Sell the NVDA Jan 2018 $75 put and collect $3.50 per contract. This trade has an 85% theoretical chance at expiring for maximum gains. If Nvidia stock falls below my strike, I will be forced to own it at that and accrue losses there-lower.
Selling naked puts is dangerous, so if I am not willing to commit to owning NVDA at $75 I can change the trade to make it one with a finite risk profile.
The Alternate Hedge: Sell the NVDA Jan 2018 $75/$70 put and collect $1.90 per contract. Here, my maximum risk is defined, yet I retain the same theoretical chance of success.
As long as NVDA stock stays above my sold puts, any premium I recover from selling my calls would be pure profit.
Learn options as easy as 1-2-3 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.
