Nvidia is due to report earnings on Wednesday after the market close and the options market recently priced in a 7.8% move in either direction for the stock. Here's how to take advantage of the artificial intelligence leader.
Nvidia stock has stayed above the lower end of the expected range for basically every earnings release since February 2021, which is an incredible record.
Let's analyze how we can structure an option trade that fits the view that, one, Nvidia stock will stay within the expected range and, two, the response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the May 30 expiration, we can see that the expected range is 7.8%. Now that we know the expected range, let's find a bull put spread that has a break-even price roughly 7.8% below the stock price.
Doing The Bull Put Spread On Nvidia Stock
Selling 100 shares of the May 30-expiring 123-strike put and buying the 118 put would create a bull put spread. This spread recently traded for around 70 cents each. Further, that means a trader selling this spread would receive $70 in option premium and would have a maximum risk of $430.
That represents a 16.3% return on risk between now and the end of the week if Nvidia stock remains above 123. If Nvidia stock closes below 118 on the expiration date the trade loses the full $430.
The break-even point for the bull put spread is 122.30. That is calculated as 123 less the 70 cents in option premium received per contract. There is little room for adjustment with short-term trades such as this held over earnings. As of Tuesday afternoon trading, the same put spread premium shrank to around 45 cents; therefore, one could consider raising the put strike prices to 122 and 127, where the spread premium received increases to 85 cents, or $85 per set of contracts.
A 16% return in a few days would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance and a bullish outlook for the stock.
Full Profit On A Previous Trade
A few weeks ago, we looked at a similar idea on Amazon which expired worthless for a full profit.
According to Investor's Business Daily's IBD Stock Checkup, Nvidia stock ranks No. 2 in its group. It also has a Composite Rating of 96, an Earnings Per Share Rating of 99 and a Relative Strength Rating of 72.
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 conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
