Nvidia is getting a nice bump premarket Wednesday thanks to the positive earnings release from Advanced Micro Devices.
According to the IBD Stock Checkup, Nvidia stock is ranked No. 1 in its industry group. It has a Composite Rating of 97, an EPS Rating of 99 and a Relative Strength Rating of 97.
When it comes to options, we normally look at short-term trades: anywhere from one week to one month. Today, we will look at a longer-term bull put spread.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a defined-risk strategy. That means you always know the worst-case scenario in advance.
Trade Profits With Higher, Sideways, Maybe Lower Move
This type of trade will profit if Nvidia stock trades sideways or higher and even sometimes if it trades slightly lower.
With Nvidia trading around 109, if we use the Oct. 18 expiration, we can sell a 95 put and buy a 90 put to set up the bull put spread. That spread is trading for roughly $1.20.
Selling this spread would generate roughly $120 in premium with a maximum risk of $380.
If the spread expires worthless that would be a 31.6% return in two and a half months provided Nvidia stock is above 95 at expiration.
The maximum loss would occur if Nvidia stock closes below 90 on Oct. 18, which would see the premium seller lose $380 on the trade.
The break-even point for the trade is 93.80, which is calculated as 95 less the $1.20 option premium per contract.
Adjusting Nvidia Stock Trade
I would set an adjustment point or a stop loss if Nvidia drops below 95. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $120.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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
