Nvidia(NVDA) closed yesterday above the 21-day and 50 day moving averages and is within striking distance of the 200-day moving average.
The Barchart Technical Opinion rating is an 8% Buy with a Weakening short term outlook on maintaining the current direction.
Rather than just buying the stock, investors can use the options market to find smart ways to trade Tesla stock with an attractive risk to reward ratio.
Implied volatility is fairly low at around 54%. The twelve month low for implied volatility is 44% and the twelve month high is 82%. The IV Percentile is 29%.
Let’s take a look at a few different option ideas on NVDA stock given the above parameters.
Bull Call Spread
The first strategy is a bull call spread. A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
A bull call spread is a risk defined trade, so you always know the worst-case scenario. Bull call spreads are positive delta (bullish) and positive vega (benefit from a rise in implied volatility).
Going out to March expiration, a 165-strike call option was trading around $13.15 yesterday, and the 170 call was around $11.25.
Buying the 165 call and selling the 170 call would create a bull call spread. The trade cost would be $190 (difference in the option prices multiplied by 100), and the maximum potential profit would be $310 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if NVDA stock closes below 165 on March 17, the most the trade could lose is the roughly $190 premium paid.
Potential gains are also capped above 170, so no matter how high NVDA stock might go, the most the trade could profit is $310.
In terms of trade management, if the spread dropped from $190 to $95, or if the stock dropped below 150, I would consider closing early for a loss.
Let’s take a look at another potential option strategy.
Bull Put Spread
A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.
To execute a bull put spread an investor would sell an out-of-the-money put and then but a further out-of-the-money put.
Typically, it’s better to use a bull put spread when the IV percentile is higher, but let’s look at an example.
Assuming a trader believes NVDA will stay above 150 between now and February 17, they could sell a 150-145 bull put spread.
Selling this spread results in a credit of around $1.65 or $165 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:
5 – 1.65 x 100 = $335.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 49%.
The spread will achieve the maximum profit if NVDA closes above 150 on February 17th in which case the entire spread would expire worthless allowing the premium seller to keep the $165 option premium.
The maximum loss will occur if NVDA closes below 145 on February 17th which would see the premium seller lose $335 on the trade.
The breakeven point for the Bull Put Spread is 148.35 which is calculated as 150 less the $1.65 option premium per contract.
Let’s look at one final trade which is a long call.
Long Call Option
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of NVDA stock, they would have to invest around $16,000 at the current price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares.
If an investor were to buy 1 NVDA 150 call option expiring on March 17, they would only need to invest around $2,100 rather than $16,000.
The breakeven price for this call option is equal to the strike price plus the premium paid, which would make the breakeven price 171.00.
The most the trade can lose is the premium paid of $2,100, which would occur if NVDA finished below 150 on March 17.
However, if NVDA stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
There you have three different bullish trade ideas for NVDA stock, but you can use these strategies on any stock with a bullish rating.
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.
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On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.