Nvidia led a broad-based tech rally on Tuesday with the stock breaking back above its 200-day moving average. For traders looking to put some money to work, this is a strong candidate. Further, those looking for a more conservative way to play Nvidia stock using options could employ a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Nvidia stock trades sideways or higher and even sometimes if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle. In exchange for selling the bull put spread, the trader receives the option premium and has risk equal to the difference in strike prices, less the premium received.
Traders who think Nvidia will stay above 125 for the next few weeks could sell a June 20 bull put spread. Selling the 125 put and buying the 120 put gives a net credit for around $1.30 a share. Selling this spread would generate roughly $130 in premium with a maximum risk of $370.
How The Bull Put Spread Works On Nvidia Stock
If the spread expires worthless that would be a 35% return in under one month. That assumes Nvidia stock is above 125 at expiration. That level currently corresponds to its 200-day line, making it an important level of support. The maximum loss would occur if Nvidia stock closes below 120 on June 20, which would see the premium seller lose $370 on the trade.
The break-even point for the trade is 123.70, which is calculated as 125 less the 1.30 option premium per contract. With Nvidia trading around 135 this morning, that gives you 8% of room before the trade goes negative.
You could set an early stop loss if the stock breaks back below its 200-day line at 125, or if the spread increases in value from $1.30 to $2.60. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
No. 3 Rank, Ideal Earnings Rating
According to Investor's Business Daily's IBD Stock Checkup, Nvidia stock ranks No. 3 in its group. It has a Composite Rating of 94 out of a best-possible 99. Its Earnings Per Share Rating is an ideal 99 and a Relative Strength Rating of 74. As of Wednesday, Nvidia owned the top spot in market capitalization among U.S.-traded shares.
For investors seeking income with defined risk, this bull put spread is appealing in current market conditions. However, with earnings due at the end of this month, there is earnings risk to the trade.
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, and is very conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
