How to Make Money on NVIDIA if You Feel like You Missed the Launch
The following is for illustrative purposes and does not constitute financial advice.
Intro
Considering the huge price movements of Nvidia recently, it makes sense that some people will be hesitant to invest. No one wants to be the investor that bought at an all-time high.
Selling put options on an expensive stock like Nvidia can be a profitable strategy to generate income while potentially buying the stock at a lower price. This provides you some insurance against buying at a top but, also providing some premium while you wait for a better price.
This method, known as cash-secured put selling, allows you to collect premium income and only obligates you to buy the stock if it falls to a predetermined price.
Here’s a step-by-step guide on how to implement this strategy effectively.
Step 1: Understand the Basics
Before diving in, it’s crucial to grasp the fundamentals of options trading. A put option gives the buyer the right, but not the obligation, to sell a stock at a specified price (the strike price) before a certain date (expiration date). When you sell a put option, you agree to buy the stock at the strike price if the option is exercised by the buyer.
Step 2: Conduct Thorough Research
Research the stock thoroughly. Understand Nvidia's financial health, market position, growth prospects, and any upcoming events that could affect its stock price. This knowledge will help you make informed decisions about the strike price and expiration date.
Step 3: Choose an Appropriate Strike Price
The further below the current price you choose the greater the probability that you will receive the full premium and not get assigned the stock. Select a strike price below the current trading price of Nvidia if you want to wait for a great buying opportunity. Or you can actually sell a put above the strike price and increase the chance that you will get assigned while making some money in the mean time. For instance, if Nvidia is trading at $950 per share, you might choose a strike price of say $650. At 650.00 the odds of assignment are low but so is the premium you will receive.
Step 4: Determine the Expiration Date
Choose an expiration date that aligns with your investment strategy. Shorter expiration dates reduce the time your capital is at risk but may offer lower premiums. Longer expiration dates provide higher premiums but increase the duration of potential obligation. For Aug 16th 2024 expirations, as of the writing of this blog the Delta for that option is .0377 this implies a probability of profit at ~96%. If it drops below that price by Aug 16th close of business then you can buy a great stock at a great price.
Step 5: Calculate the Premium Income
Use an options pricing calculator or check your brokerage’s platform to determine the premium you’ll receive for selling the put option. The premium compensates you for the risk of potentially having to buy the stock. Ensure the premium is attractive enough to justify the risk. For the above trade the premium received would be about 350.00. Max loss would be ~65K but the probability of profit is over 96%.
Step 6: Sell the Put Option
Log into your brokerage account and sell the put option. This involves specifying the strike price, expiration date, and number of contracts. One contract typically covers 100 shares. For example, selling one put option with a strike price of $650 might earn you a premium of $3.50 per share, or $350.00 total.
Step 7: Monitor the Position
Keep a close eye on Nvidia’s stock price and overall market conditions. If the stock remains above the strike price at expiration, the put option will expire worthless, and you keep the premium as profit. If the stock falls below the strike price, be prepared to buy Nvidia at the agreed price.
Step 8: Plan for Assignment
If Nvida’s stock price drops below the strike price and the put option is exercised, you will be obligated to buy the stock at the strike price. Ensure you have enough funds in your account to cover the purchase. Owning the stock at a lower price than the market rate can still be a beneficial outcome if you believe in its long-term potential.
Step 9: Adjust or Roll the Position
If the market moves against you, consider rolling the put option to a later expiration date or a different strike price to manage risk and potentially increase premium income. This involves closing the current position and opening a new one.
Conclusion
Selling put options on an expensive stock like Nvidia can be a strategic way to generate income and position yourself to buy the stock at a lower price. By understanding the basics, conducting thorough research, and carefully selecting strike prices and expiration dates, you can effectively use this strategy to enhance your investment returns. Always monitor your positions and be prepared to manage risks as market conditions change.