NVIDIA 
NVDA has experienced a nice upswing and is apparently once again well received by investors.
NVDA stock is back above the 20-day moving average and appears ready to break the 50-day line next.
COMPANY DATA
NVIDIA Corporation is the world leader in visual computing technologies and the inventor of the graphics processing unit (GPU).
Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI)-based solutions that now support high-performance computing (HPC), gaming and virtual reality (VR) platforms.
The success of NVIDIA GPUs is due to the parallel processing capabilities supported by the thousands of compute cores required to run deep learning algorithms.
The company’s GPU platforms play a key role in the development of multi-billion dollar end markets such as robotics and self-driving vehicles.
NVIDIA is a dominant name in the data center, professional visualization and gaming markets, where Intel and Advanced Micro Devices are playing a catching-up role.
The company’s partnership with almost all major cloud service providers (CSPs) and server providers is an important catalyst.
NVDA BULL PUT SPREAD
Today we will look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer term trade.
Longer-term options trades tend to move a little slower than shorter-term ones. This allows more time for adjustments or closeouts, but also means a lower annualized return.
As a reminder, a bull put spread is a bullish trade that can also benefit from a decline in implied volatility.
The maximum profit on a bull put spread is limited to the premium received, while the maximum potential loss is also limited. To calculate the maximum loss, take the difference between the strike prices of the long and short options and subtract the premium received.
Implied volatility is currently at 63.71%, which corresponds to a NVDA and IV percentile of 90% and an IV rank of 54%.
Remember that Nvidia has to announce its results on August 28th.
When entering into credit spreads, such as a bull put spread, it is better to look for a stock with a high implied volatility percentage.
To create a bull put spread, we sell an out-of-the-money put and then a put that is even further out of the money.
If we go to December, we could sell the December 20 put with a strike price of $85 and buy the $80 put, creating a bull put spread.
This spread traded for about $0.80 yesterday. This means that a trader selling this spread will receive $800 in option premium and have a maximum risk of $420.
That represents a 19% risk return between now and December 20 if NVDA stock stays above $85.
If NVDA stock closes below $80 on expiration, the trade loses the full $420.
The break-even point for the bull put spread is $84.20, which is $85 minus the option premium of $0.80 per contract.
This break-even price is around 28.7% below yesterday’s closing price.
Conclusion and risk management
One way to set a stop loss on a bull put spread is based on the premium received. In this case, we received $80, so we could set a stop loss equal to the premium received, or a loss of around $80.
Another way to manage the trade is to set a point on the chart to adjust or close the trade. This could be when the stock breaks the important $100 mark.
Please remember that options involve risk and investors can lose their entire investment.
This article is for educational purposes only and does not constitute a trading recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
As of the date of publication, Gavin McMaster had no position (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.
