Another corrective move in shares of Nvidia (NASDAQ:NVDA) is taking shape courtesy of geopolitical tensions. But before you panic, if recent history rhymes, investors stand to do well in NVDA stock using a well-positioned, bear-to-bull put butterfly spread. Let me explain.
Chip stocks came unglued to kick off the trading week, and nowhere was investor panic more pronounced than in Nvidia. Escalating trade war fears and stricter foreign ownership measures aimed directly at large-cap technology were behind the price swoon which clipped the semis by more than 3.5% and NVDA stock by an outsized 4.7%.
With semiconductor outfits like Nvidia highly reliant on China for revenue, there is a lot at stake. Increased sanctions could pose additional risks for the industry and NVDA stock, as products manufactured in China are built with U.S. components and chips. And if the trade war gets more aggressive, all those electronic gadgets which we can’t seem to do without, will become prohibitively more expensive and/or harder to get your hands on.
NVDA Stock Weekly Chart
The good news is that beyond today’s doom and gloom fear-mongering headlines, the weekly chart of NVDA shows shares are still unequivocally in an uptrend. The bad news is near-term, a handful of counter moves over the past couple years suggests Monday’s aggressive drop isn’t over just yet.
Bottom line, corrective moves up to 30% for a growth stock are par for the course. And NVDA is no exception as it has had its share of corrections nearing 20% which fall into that type classification. As much and should today’s price action continue to rhyme with historical tendencies, bullish traders should have an opportunity to buy NVDA as it tests the 200-day simple and that sacrosanct series of higher lows within the uptrend.
NVDA Stock Bear-to-Bull Put Butterfly
Reviewing NVDA stock’s options, I’m favoring a below-the-market long put butterfly as a way to position. This type strategy can profit handsomely from an anticipated larger corrective move. It can also be used as a means to buy shares with reduced and limited-risk should Nvidia make its way into our buy zone described above.
One such butterfly combination which looks reasonably priced is the July $235/$220/$205 put combination for $2.30. With NVDA stock near $239 this strategy offers a nice profit range in-between $207.30 to $232.70 to take advantage of a continued correction with risk contained to roughly 1% of shorting shares.
The max payout for this butterfly is if NVDA landed on $220 at expiration and near the 200-day simple moving average. While unlikely, if time and price did work in perfect harmony together, the position would explode in value and offer a profit of $12.70 per spread.
The downside to this strategy for some investors might be the fact profits below $220 begin to evaporate dollar for dollar and eventually give way to a loss of the full debit below $205. But for other like-minded investors who understand that market prices dictate when a bear should switch sides, being in position to buy NVDA stock for a $2.30 premium below $205 looks like a decent proposition.
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.
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