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Nvidia Inc (NVDA) stock has been treading water and flying higher today. This has elevated the short-put yields available to short sellers of near-term expiry out-of-the-money (OTM) put options - now over 2.5% for less than one month to expiration.
NVDA is at $137.07, up $2.37 or +1.8% today, but it has been treading water for over the last two months. That makes it ideal for short sellers of OTM puts for expiry in less than one month.
I discussed this in a recent Barchart article, “Nvidia Stock is Down Since Earnings, but Short-Put Yields Are Still High,” published on Dec. 1.
The article and a previous one on Nov. 23 point out that NVDA stock looks cheap based on its strong free cash flow (FCF) and FCF margins, “NVDA Stock Looks Cheap to Value Buyers Based on its Huge FCF Margins.”
Short Put Plays Have Worked Well
Nvidia stock could be worth as much as $179 per share, assuming it makes $88.5 billion in FCF next year and the market gives NVDA stock a 2.0% FCF yield.
That led me to suggest that shorting the $132.00 strike price put options expiring this Friday, Dec. 27 would be a good bet. They were trading for $2.63 on the bid side, giving the investor an immediate 2.0% yield (i.e., $2.63/$132.00) for the next 27 days (almost 1 month).
Today those puts are trading for just 61 cents. After all, the stock is substantially higher than the strike price and there are only 4 days left until expiry. The trade could expire worthless, which is what a short-seller of OTM put options wants to see.
Therefore, it makes sense to consider rolling these play over or making a new short-put play in another out-of-the-money (OTM) strike price in the near term.
Shorting OTM Puts Now
For example, look at the Jan. 17, 2025, expiration period, 27 days to expiry (DTE). These have even higher yields for the same delta ratio strike price.
The $132 strike price (same as before) now has a $4.10 strike price. That gives the short seller of these puts an immediate yield of 3.106%.
Note that you could roll out of the Dec. 27 $132 strike price put play (i.e., enter a trade to “Buy to Close”) at $0.63, and then enter this new short put trade to “Sell to Open.” The net income would be $4.10-$0.63, or $3.47, or a net yield of 2.62% (i.e., $3.47/$132.00).
For those investors who are more risk-averse, the $130 strike price is still attractive. It is over 5% out-of-the-money, but the premium is similar to the roll-over play - $3.45/$130.00 or 2.654%.
Here is what this means on a practical basis. First, the investor secures $13,000 in cash or buying power with their brokerage firm. That acts as collateral in case the stock falls to $130.00 on or before Jan. 17, 2025. The account would then be assigned to buy 100 shares at $130.00.
But then, after entering the order to “Sell to Open” 1 put contract at $130.00, the account will immediately receive $345 (i.e., $3.45 x 100 share per contract shorted). That is why the yield is 2.654% (i.e., $345/$13,000 invested).
Downside Issues and Considerations
The risk here is that NVDA stock collapses and the investor is assigned to buy 100 shares at $130, but the stock ends up trading at $125.00 or lower. That means there is a potential unrealized capital loss potential. (Note that covered call investors, if assigned to exercise selling their shares, end up with a realized gain.)
However, the investor has some downside protection. First, by continuously entering these short put plays, the investor gains some income buildup in their account. For example, even after rolling this trade over the investor would have gained $2.63 from the prior short put play, plus $3.47 (net) from this new rollover trade.
That means that there is $6.10 in income gained over the past 4 weeks. So the investor's breakeven, if assigned to buy shares at $132.00, would be just $125.90 per share (i.e., $132-$6.10). That is 8.7% below today's trading price.
In addition, the investor can continue to do these trades going forward. That will provide extra income, especially if the stock stays flat. The existing NVDA shareholder or those who sell short covered calls can make extra income as well as gain any upside in the stock from here.
The bottom line is that NVDA stock still looks undervalued here. One way to play while the stock treads water is to sell short OTM puts in nearby expiry periods.
