Shorting Nvidia Out-of-the-Money Put Options Is Good Way to Make Extra Income

It makes sense for Nvidia Inc (NVDA) investors and also non-shareholders to sell short out-of-the-money Nvidia put options here. This is based on the high yields available in near-term expiry periods, such as two or three weeks away.

I discussed this in my last Barchart article on June 17, “Nvidia Stock Could Be Worth $200 Per Share Based on Its FCF, +53% More.” At the time, NVDA stock was at $131.03 and I suggested shorting the July 12 $127.00 strike price put option. 

Shorting NVDA Puts Makes Money

It was trading for $4.35 on the bid side and provided the short seller an immediate 3.425% yield (i.e., $4.35/$127.00) in just 25 days. So far that play has worked out for the short seller even though NVDA stock has fallen.

That is the beauty of shorting options, especially in near-term expiry periods (i.e., less than 1 month). They are a wasting asset in the last month, which favors the short seller. That especially applies to NVDA puts, since their premiums are so elevated.

For example, today these $127 strike price puts (expiring July 12) are lower at $1.93 in the mid-price. Therefore, the short seller has made $2.43 (i.e., $4.35-1.92) per contract shorted, or 55.9% (i.e., $2.43/$4.35). If NVDA stays over $127 by Friday, this option will expire worthless.

12NVDA puts expiring July 12 - Barchart - As of July 8

Repeating This Short Put TradeIt makes sense to look at repeating this trade. For example, look at the July 26 put option expiry period. It shows that $125 strike price puts, which are 3.20% out-of-the-money (OTM) for the next 18-day period ending July 26, are trading for $3.70 per put contract.

That provides an immediate yield of almost 3% (i.e., $3.70/$125.00 = 2.96%) for less than three weeks until expiration. This is a very good yield and comparable to the prior play above (3.425%).

NVDA puts expiring July 26 - Barchart - As of July 8

How This Works

Here is how this works out. An investor must first secure $12,500 in cash and/or margin with their brokerage firm. That way the account has enough capital to buy 100 shares at $125 per share, in case the stock falls to the strike price of $125.00 on or before July 26.

However, the account will immediately receive $370 in income. That works out to 2.96% of the $12,500 invested in this play. It also lowers the effective breakeven price to $125-3.70, or $121.30, or 5.4% below today's price.

That is why this is a good way for new investors who are considering buying NVDA shares to short OTM puts. It provides a lower entry price with an income play. 

Keep in mind though that the investor may never end up buying NVDA shares if their strike price is so far out-of-the-money (OTM) that an automatic buy is never triggered.

Moreover, for existing investors in NVDA stock, this is a way of generating extra income. For example, repeating this 2.96% yield play every 3 weeks for a quarter works out to an expected return (ER) of almost 12% (i.e., 2.96% x 4 = 11.84%). That is a high ER for most investors.

The bottom line is that investors can make extra income shorting these OTM puts given how high the NVDA put premiums are today.

On the date of publication, Mark R. Hake, CFA 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.