Nvidia is due to report earnings on Wednesday after the closing bell, and the options market is pricing in an 10.2% move in either direction. Nvidia stock has stayed above the lower expected range following all six of the last six earnings announcements.
Let's analyze how we can structure an option trade that fits the view that:
- We think Nvidia will stay within the expected range.
- We think the earnings reaction is likely to be positive.
Nvidia Stock: Earnings On Tap
Taking the at-the-money put and call for the May 24 expiration added up to around 93.15 this morning. That means the expected range, according to the options market, is 10.3%. But that doesn't suggest direction.
Now that we know the expected range, let's find a bull put spread that has the short strike roughly 10.3% below the stock price.
Selling the May 24, 805-strike put and buying the 800 put create a bull put spread. The spread traded around 90 cents this morning.
That means a trader selling this spread would receive $90 in option premium. That's also the maximum profit if the spread expires worthless.
With $5 between the strikes, subtract the premium received and you get the maximum risk of $410.
Managing The Trade
Taking the maximum profit divided by the maximum risk gives you a 22% return on risk between now and May 24. All Nvidia has to do is stay above 805 by expiration.
The break-even point for the bull put spread is 804.10. That's simply the 805 short put less the 90 cents option premium per contract. If Nvidia stock closes below that level at expiration, the trade starts to turn negative.
If NVDA closes below 800 on the expiration date, the trade loses the full $410.
There is little room for adjustment with short-term trades such as this held over earnings.
A 22% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with a high-risk tolerance.
According to IBD Stock Checkup, Nvidia ranks No. 1 in its group and has perfect Composite and EPS ratings of 99 and a Relative Strength Rating of 98.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
