Nvidia tumbled Tuesday, dropping over 9% and triggering a short-selling restriction.
Nvidia stock slid 9.5% in the regular session. It fell further in extended trading after Bloomberg reported that the U.S. Justice Department subpoenaed the AI-chip maker and others amid antitrust concerns about the company.
While the stock may be temporarily restricted from short selling, we can still place bearish option trades. Those can also act as somewhat of a hedge on a long-term stock position.
Today, I'm looking at a bear call spread on Nvidia stock.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways and even if it trades slightly higher, as long as it stays below the short call at expiry.
An October-expiry bear call spread on Nvidia using the 130-135 strike prices can be sold for around $0.55.
Potential Return Of 12%
Traders selling the spread would receive $55 in option premium, which is also the maximum possible gain. The maximum loss would be $445.
That represents a potential return of 12.36% between now and Oct. 18.
The spread will achieve the maximum profit if Nvidia stock closes below 130 on Oct. 18. In that case, the entire spread would expire worthless, allowing the trader to keep the $55 option premium.
The maximum loss will occur if Nvidia closes above 135 on Oct. 18, which would see the premium seller lose $445 on the trade.
Maximum Loss Limited
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop-loss could be set if Nvidia trades above 120, or if the spread value rises from $0.55 to $1.10.
Because this is a bearish position, traders who think Nvidia stock could move higher from here should not enter this trade. The position starts with a delta of -7, meaning it is roughly equivalent to being short 7 shares of Nvidia stock.
According to the IBD Stock Checkup, Nvidia stock is ranked No. 3 in its industry group. It has a Composite Rating of 92, an EPS Rating of 99 and a Relative Strength Rating of 96.
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
