Nvidia has become a central player in the artificial intelligence boom, with its chips powering everything from generative AI models to autonomous vehicles. For traders worried about paying too much for Nvidia stock, a cash-secured put could be an attractive way to potentially buy shares at a discount.
Nvidia is a global technology company best known for designing high-performance graphics processing units used in gaming, professional visualization, and data centers.
Its revenue primarily comes from selling graphics processing units, AI chips, and software platforms to cloud providers, enterprises, and automotive companies.
So let's take a look at how a cash-secured put trade might look on Nvidia. As a reminder, a cash-secured put 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 understands that they may be assigned a contract of 100 shares at the strike price.
Losses Partially Offset By Premiums
Let's assume we're happy to buy 100 shares of Nvidia stock any time between now and Aug. 15. Selling an Aug. 15-expiring strike put at 165 would generate around $340 in premium, based on recent trading. Further, that means the put seller must purchase 100 shares of Nvidia stock at 165 if called upon by the put buyer.
Calculate the break-even price by taking the strike price less the premium received. That gives a break-even price of 161.60, or 6.6% below Thursday's closing price.
If the stock stays above 165 at expiry, the put expires worthless. But that also leaves the trader with a 2.1% return on capital at risk. It works out to around 26% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade suffers a loss. But the premium for selling the put partially offsets the loss.
The maximum loss on the trade occurs if Nvidia stock falls to zero. In that case, the trade loses $16,160. But most traders cut their losses before then.
Top Ranking For Nvidia Stock
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put does get assigned, investors take ownership with a reduced cost base. Further, they can potentially begin selling covered calls to generate additional income from the position.
According to Investor's Business Daily's IBD Stock Checkup, Nvidia stock ranks first in its group. It also has a Composite Rating of 98, an ideal Earnings Per Share Rating of 99 and a Relative Strength Rating of 92.
Nvidia plans to announce second-quarter earnings in late August, so no earnings risk comes with this trade.
It's important to remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster is founder and operator of Options Trading IQ, a website offering instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
