How to Game Nvidia Corporation (NVDA) Stock for Future Profits

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A lot has happened over the past month off and on the price chart for Nvidia Corporation (NASDAQ:NVDA), and much of that has been favorable for bulls. But for today’s investors wanting to own NVDA stock, a better choice is, once more, an ‘either or’ options combo. Let me explain.

NVDA Stock: How to Game Nvidia Corporation (NVDA) Stock for Future Profits

One month ago and on the heels of a rip-roaring good earnings report and an equally strong approval rating from investors which jettisoned NVDA stock higher, I discussed the use of a bullish modified fence strategy.

Since that time, momentum off the Nvidia price chart has continued to build and the company is appearing increasingly well-positioned for growth in hot areas like artificial intelligence and deep learning, as well as cryptocurrencies.

Most recent and beyond my technology pay-grade is word of Nvidia’s growing artificial intelligence and deep learning partnership with German giant Volkswagen (OTCMKTS:VLKAY). The relationship is aiming to branch off beyond autonomous automobiles and into areas such as optimizing city traffic patterns and improving how robots and humans work together.

There’s also buzz Nvidia has a chip designed specifically for mining cryptocurrencies. It’s unconfirmed, but ASUS, a leading manufacturer of graphics cards has put up product specs on its website and further supporting bulls eyeing the sky as the limit for NVDA stock.

Elsewhere though, conditions look less robust in the short-term. On the Nvidia price chart, that other important market dynamic of shares having reached great heights already and gravity beginning to weigh in on NVDA stock has entered the picture.

NVDA Stock Daily Chart

Source: Charts by TradingView

Since last writing about NVDA, shares have gained a very respectable 9% for investors. Even better for some, Nvidia rallied to score fresh all-time-highs. To say the least, the overall trend has been friendly for bulls, though more so at some price levels than others.

A bit closer to the daily chart action, NVDA has put in a topping pattern. Our view is shares are in decent position for continued profit-taking and likely, a larger, but healthy correction within the existing uptrend.

What does that mean? For a growth name like Nvidia, it could be a pullback as deep as $50, or roughly 30%. A decline of that size may seem wildly volatile, but it’s generally accepted by intermediate-term investors as par for a stock that’s had a sizable rally like NVDA has.

NVDA Stock Bullish Spread Combo  

Given my technical view of lower prices for NVDA, but bullishness on the company’s future prospects, a large pullback like the one described should be a welcome technical event. But what if the opportunity to buy Nvidia at a healthy discount fails to materialize?

What if a 30% drop and a nice-looking test of technical support near $120 doesn’t happen before NVDA stock reverses and reaches new highs? This can be a tough “either or” situation for stock investors.

The good news for like-minded investors is buying a modified fence on NVDA stock could resolve this dilemma. This long delta spread looks to position without the headaches of timing a bottom in shares, while participating in potential rallies using a combination of a long call vertical and short put spread.

If this sounds familiar, it is. Our last article detailed a July modified fence priced for a debit of 35 cents. The spread has offered profits of $3 to $3.50 over a handful of sessions during the past month and is currently trading for $1.90. To say the least, this modified fence has been a very nice, limited-risk alternative to being long NVDA stock.

Currently and with our continued ‘either or’ willingness to be long NVDA, selling the Sep $125/$120 put spread and buying the Sep $165/$170 call vertical is priced for a debit of 20 cents looks attractive with NVDA stock trading at $146.58.

What does this spread package offer the trader? At expiration, if NVDA stock remains between $125 and $165 the combination will expire worthless and the small debit will be forfeited. But if shares rally during the life of this combo, the long delta position could easily enjoy profits below the call spread.

Even better, above $165 the trader owns the call vertical for just 20 cents. This results in a max payout opportunity of $4.80 above $170 at expiration.

But what if NVDA stock continues to correct beyond our wildest dreams? On the downside the fence combo maintains a breakeven of $125.20. That’s a margin of safety of nearly 15% from today’s share price.

Bottom line though, risk is limited to $5.20 below $120, or just over 4% of NVDA stock risk. That’s important for deep value buyers of NVDA as the opportunity to buy shares at a much deeper discount with total risk control is more than theoretically possible, should a real world and less-healthy-looking, but likely opportunistic, correction occur.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/nvidia-corporation-nvda-stock-game-future-rally/.

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