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Is Nvidia (NVDA) the most important stock in the world? It sure feels that way at times.
As a leading provider of graphics processing units (GPUs), Nvidia powers advancements in artificial intelligence (AI), data centers, gaming, and autonomous vehicles.
Its GPUs are integral to AI research, enabling breakthroughs in machine learning and deep learning algorithms.
Moreover, Nvidia's technology is essential for the development of high-performance computing solutions, supporting critical applications in areas such as scientific research, healthcare, and finance.
With its innovative products and strategic partnerships, Nvidia continues to shape the future of technology and drive significant growth across various sectors, solidifying its position as a cornerstone stock in today's ever-evolving digital landscape.
Looking through the stock performance on NVDA over the recent earnings announcements, is sure to make NVDA bulls happy.
Feb 2024 +16.4%
Nov 2023 -2.5%
Aug 2023 +0.1%
May 2023 +24.4%
Feb 2023 +14.0%
Nov 2022 -1.5%
Aug 2022 +4.0%
May 2022 +5.2%
Feb 2022 -7.6%
We have to go back as far as February 2022 do find a meaningful drop in the stock price following an earnings announcement.
Of course, past performance is no guarantee of future performance, but I would rather stick with the bulls on this one.
NVDA Earnings Bull Put Spread
With earnings set for Wednesday after the closing bell, implied volatility on NVDA stock is through the roof.
Implied volatility is sitting at 55.57% compared to a twelve-month low of 32.04% and a high of 68.21%.
That means, it’s a great time to be an option seller.
If you have a bullish outlook for Nvidia for their earnings announcement, then a bull put spread is a great strategy to employ.
To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread.
A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put.
Potential Benefits
Bull put spreads offer several advantages for options traders seeking to generate income while managing risk.
They provide a defined-risk strategy, allowing traders to know their maximum potential loss upfront.
Additionally, bull put spreads benefit from time decay, as they profit from the erosion of extrinsic value over time.
This time decay accelerates as the expiration date approaches.
Bull put spreads will benefit from the drop in implied volatility that always occurs after an earnings announcement.
Potential Risks
While bull put spreads offer enticing benefits, they also come with inherent risks.
One significant risk is the potential for substantial losses if the underlying stock's price declines sharply.
Traders must also consider the possibility of early assignment, which can occur if the stock price moves below the short put option's strike price before expiration.
It's essential for traders to thoroughly understand and manage these risks when implementing this options strategy.
Selling an NVDA Bull Put Spread
A trader selling the May 24, $845-strike put and buying the $840-strike puts on NVDA would receive around $150 into their account, and would have a maximum risk of $350.
That represents a 43% return on risk between now and May 24th if NVDA stock remains above $845.
If NVDA stock closes below $840 on the expiration date the trade loses the full $350.
The breakeven point for the bull put spread is $838.50 which is calculated as $845 less the $1.50 option premium per contract.
Company Details
The Barchart Technical Opinion rating is an 88% Buy with a Strengthening short-term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is in highly overbought territory. Beware of a trend reversal.
Of the 40 analysts covering NVDA, 35 have a Strong Buy rating, 2 have a Moderate Buy rating and 3 have a Hold rating.
Conclusion
Selling a bull put spread on NVDA ahead of earnings can offer traders an opportunity to capitalize on anticipated bullish sentiment while managing downside risk.
By carefully selecting strike prices and expiration dates, traders can position themselves to potentially profit from a favorable earnings outcome while limiting potential losses.
However, it's crucial for traders to conduct thorough analysis and adhere to risk management principles to navigate the inherent uncertainties associated with earnings events.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
