Nvidia (NVDA) is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU.
Over the years, the company's focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms.
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NVIDIA's GPU success can be attributed to its parallel processing capabilities supported by thousands of computing cores, which are necessary to run deep learning algorithms.
The company's GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.
NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role.
The company's partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.
Nvidia has stayed above the expected range following their three most recent earnings announcements.
NVDA Earnings Bull Put Spread
With earnings set for May 20th after the market close, implied volatility on NVDA stock is through the roof.
Implied volatility is sitting at 77% compared to a twelve-month low of 31.73%.
That means, it’s a great time to be an option seller.
If you have a bullish outlook for Nvidia for their earnings announcement, then a bull put spread is a great strategy to employ.
To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread.
A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put.
Potential Benefits
Bull put spreads offer several advantages for options traders seeking to generate income while managing risk.
They provide a defined-risk strategy, allowing traders to know their maximum potential loss upfront.
Additionally, bull put spreads benefit from time decay, as they profit from the erosion of extrinsic value over time.
This time decay accelerates as the expiration date approaches.
Bull put spreads will benefit from the drop in implied volatility that always occurs after an earnings announcement.
Potential Risks
While bull put spreads offer enticing benefits, they also come with inherent risks.
One significant risk is the potential for substantial losses if the underlying stock's price declines sharply.
Traders must also consider the possibility of early assignment, which can occur if the stock price moves below the short put option's strike price before expiration.
It's essential for traders to thoroughly understand and manage these risks when implementing this options strategy.
Selling an NVDA Bull Put Spread
A trader selling the May 22nd, $210-strike put and buying the $205-strike put on NVDA would receive around $94 into their account, and would have a maximum risk of $406.
That represents a 23.15% return on risk between now and May 22nd if NVDA stock remains above $210.
If NVDA stock closes below $205 on May 22nd the trade loses the full $406.
The breakeven point for the bull put spread is $209.06 which is calculated as $210 less the $0.96 option premium per contract.
Company Details
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Of the 49 analysts covering NVDA, 44 have a Strong Buy rating, 3 have a Moderate Buy rating, 1 has a Hold rating and 1 has a Strong Sell rating.
Conclusion
Selling a bull put spread on NVDA ahead of earnings can offer traders an opportunity to capitalize on anticipated bullish sentiment while managing downside risk.
By carefully selecting strike prices and expiration dates, traders can position themselves to potentially profit from a favorable earnings outcome while limiting potential losses.
However, it's crucial for traders to conduct thorough analysis and adhere to risk management principles to navigate the inherent uncertainties associated with earnings events.
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.
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.
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