All eyes are on Nvidia (NVDA) earnings, with the company announcement set for Wednesday after the market close.
The options market is pricing in a 9.8% move in either direction, and Nvidia has stayed above the lower expected range following all six of the company’s latest earnings announcements.
Let’s analyze how we can structure an option trade that fits the view, namely that 1) we think Nvidia will stay within the expected range, and 2) the response to the earnings report is likely to be positive.
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What Is A Bull Put Spread?
Taking the at-the-money put and call for the Nov. 22 expiration, we can see that the expected range is 9.8%.
Now that we know the expected range, let’s find a bull put spread that has a breakeven price roughly 9.8% below the stock price.
Selling the Nov. 22, 130-strike put and buying the 125 put would create a bull put spread.
Nvidia Trade Creates $90 In Premium
This spread traded for around 90 cents late Friday. That means a trader selling this spread would receive $90 in option premium and would have a maximum risk of $410.
That represents a 21.95% return on risk between now and Nov. 22 if Nvidia remains above 130.
If Nvidia closes below 125 on the expiration date, the trade loses the full $410.
The breakeven point for the bull put spread is 129.10. That’s calculated as 130 less the 90-cent option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings.
A 22% return in a few days would be nice, but the possibility of losing 100% is also very real.
Nvidia Trade Is High-Risk
As such, this style of trade is only for traders with a high risk tolerance.
According to the IBD Stock Checkup, Nvidia is ranked No. 8 in its industry group. It has a Composite Rating of 97, an EPS Rating of 99 and a Relative Strength Rating of 97.
Last week, we looked at a cash secured put on Spotify (SPOT), which worked out well.
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, 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
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