Nvidia is a high-volatility stock that just bounced back above the 50-day moving average.
Nvidia is a leading designer of graphics processing units (GPUs) for gaming, professional visualization, data centers and automotive markets.
On Tuesday, the stock closed more than 2% higher.
In policy developments, investors viewed President Donald Trump's revocation of a prior executive order on artificial intelligence as a move to relax AI regulations. That potentially benefits chipmakers like Nvidia.
Nvidia Cash Secured Put Trade
One way to take ownership of a stock for less than the current price is via a cash secured put option trade.
Let's take a look at how a cash secured put trade might look on Nvidia.
This type of trade involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price.
Anyone selling puts should understand they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of Nvidia at a price of 132 any time between now and Feb. 21.
Selling a Feb. 21, 132-strike put would generate around $250 in premium. The put seller would have the obligation to purchase 100 shares of Nvidia at 132 if called upon to do so by the put buyer.
The breakeven price for the trade is the strike price less the premium received. In this case, that gives a breakeven price of 129.50. That's 7.94% below Tuesday's closing price.
Nvidia Trade Could Return 23% Annualized
If the stock stays above 132 at expiry, the put expires worthless. That would leave the trader with a 1.93% return on capital at risk. That works out to around 23% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. However, the premium received will partially offset the loss.
The maximum loss on the trade would occur if Nvidia fell to $0, which would see the trade lose $12,950. But most traders would cut their losses before then.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
If the put does get assigned, the investor takes ownership with a reduced cost base. Traders can potentially begin selling covered calls to generate additional income from the position.
Nvidia Leads Industry Group
According to the IBD Stock Checkup, Nvidia is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 93.
It's important to 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
