Stocks are flying off the shelves like the hottest toys ahead of Christmas. And the number of industries rocketing higher continues to grow. One of the best lookers is semiconductors, but not all chip stocks are running into year-end. Nvidia (NASDAQ:NVDA), once the belle of the ball, has cooled in recent months. Traders are dubbing it dead-money, at least for now. Today I’ll show you how to pull profits from Nvidia stock anyway.
It requires at least an elementary understanding of the options market. Sometimes referred to as derivatives, options contracts allow you to create trades that profit from the type of neutrality we’re currently seeing from NVDA. It has to do with selling a promise to do something that ultimately you won’t have to make good on, such as buying shares at a particular price.
More on that in a moment. First, let’s take a closer look at the boring range being carved out in prices.
Nvidia Stock Is Putting Me to Sleep
For a stock with a reputation for momentum-laced rallies and mouth-watering moves, Nvidia has not been living up to expectations this quarter. Since peaking at $589.07 on Sept. 2, prices have actually sunk nearly 12%.
That wouldn’t be so bad if the market at large, and semiconductors in particular, were sagging alongside it. But they haven’t! The Nasdaq paused for much of the past month, but it has since woken up and ramped to a new record.
Meanwhile, Nvidia has been sawing logs, and no amount of wishing or prodding by impatient shareholders has caused it to stir. With Wednesday’s nasty whack to tech, prices have fallen well below the 50-day moving average to signal bears have the upper hand — at least in the short run.
But perhaps the comparison to the Nasdaq is too broad. Let’s drill into the semiconductor industry to see if Nvidia’s peers are sharing the neutrality.
Consider the chart of the Vaneck Vectors Semiconductor ETF (NASDAQ:SMH) below.
So much for that theory! SMH is beating the pants off the Nasdaq, but Nvidia drifts regardless. The stark relative weakness means one thing. There are better semiconductor picks right now than NVDA. And by “better,” I mean more bullish.
Fanboys will rightly argue that Nvidia’s respite was well-deserved, and it’s been a killer investment this year. The current tally for 2020 is a 121% gain. Unfortunately, I can’t go back to January and buy it. We have to play the current hand, and as outlined above, it’s one that isn’t all that appealing. If you want to trade it here, I have two suggestions.
Two Ways to Play
First, wait for prices to push back above the 50-day moving average and old resistance at $550. The short-term trend will have turned bullish, giving you more confirmation that buyers have regained control. At that point, I like bull call spreads.
Second, if you think the trading range will persist, or at least that Nvidia won’t fall too far from here, then sell put spreads. For example, you can sell the January $450/$445 bull put for 65 cents credit. If prices sit above $450 at expiration, then you’ll capture the max reward of $65. The initial cost is $435, so that translates into a potential return of 15%.
That’s not bad for a month’s worth of work on a stock that is otherwise going nowhere. Here’s how the position amounts to getting paid for a promise you don’t end up having to keep.
By selling the $450 put, you’re obligated to buy shares if prices fall below $450. But if we remain above that level, then the contract expires, and you never have to make good on your promise.
On the date of publication, Tyler Craig held a LONG position in AMD.
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