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Nvidia Inc. (NVDA) stock has been volatile, but investors can still earn over 1% yields shorting out-of-the-money (OTM) put options. This makes them attractive to investors ahead of earnings, which will be released next Wednesday, May 28, after the market close.
For example, NVDA puts have a yield of 1.39% for exercise prices expiring in 2 weeks at 10% below today's price,. So, even if NVDA falls over 11% next week after earnings are released, investors can break even.
NVDA is at $134.23 in midday trading on Tuesday, May 20. I discussed Nvidia's upcoming earnings forecast and valuation in a recent Barchart article on May 13 ("Unusual Activity in Nvidia Put Options Ahead of Earnings - Are Investors Still Bullish?").
I argued that NVDA could be worth $159.20, or +18.6% higher than today's price. However, it's not uncommon for investors to “sell on the news” after earnings results.
Therefore, let's see why shorting deep out-of-the-money (OTM) puts might be attractive here.
Selling Short Deep OTM Puts
For example, look at the June 6 expiration period, just over two weeks from now. It shows that strike prices about 10% lower than today's price, i.e., $121.00 and $120, have high premiums.
The $121 put strike price has a bid side premium of $1.84. This provides a short-seller an immediate yield of 1.52% (i.e., $184/$12,100 per contract). That exercise price is 9.85% below today's price.
Similarly, the $120 put strike price trades for $1.65, or a yield of 1.375% (i.e., $165/$12,000).
Moreover, the delta ratios are very low, indicating a low probability of NVDA falling to these strike prices. That is, there is a high chance of a profit from shorting these deep out-of-the-money puts.
Downside Risks and Hedges
Note that the worst that can happen here is that the investor will be forced to buy shares at these prices. This assumes that NVDA falls to $121 or $120 on or before June 6, 17 days from now.
But even if that happens, the breakeven points are lower. For example, given income already received, the $120 strike price short put play has a $118.35 net buy-in breakeven price (i.e., $120-$1.65). That is 11.8% lower than today's price.
In effect, then, this is a way for existing investors to lower their average cost and pick up extra income in the process. That way they gain all the upside if NVDA rises after earnings are released.
More risk-averse investors can use these premiums to buy put options are slightly lower strike prices. That way, the potential for large unrealized losses is limited.
On the other hand, more enterprising investors can also sell out-of-the-money calls to enhance their yields. For example, the $148 call options have a midpoint premium of $2.04 for expiry on June 6. That provides a covered call yield of 1.52% (i.e., $2.04/$134.23). This strike price is also over 10% higher than today's price.
So, there are ways to enhance this yield, shorting both out-of-the-money puts and calls for strike prices that are over 10% away from today's price in just two weeks.
Investors can study the risks associated with shorting puts and calls by going to Barchart's Options Learning Center tabs, including the Options Trading Risks tab.
