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Nvidia Earnings: Bull Put Spread Offers Capped Gains, Lower Risk Than Buying Calls

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As Nvidia prepares to report its latest quarterly earnings on Wednesday after the market close, options traders are bracing for big moves in the chipmaker’s stock price. The options market is currently pricing in a potential 11.3% swing in either direction when Nvidia reveals its numbers.

With Nvidia’s stock surging over 60% so far this year, investors are keen to see if the company can build on its tremendous momentum. Over the past six earnings reports, Nvidia has managed to keep its share price above even the lower end of the options market’s expected trading range.

So for traders feeling bullish on Nvidia ahead of this week’s announcement, one options strategy to consider is a “bull put spread” – a trade that bets the stock won’t fall too far and offers a favorable risk/reward profile.

Breaking Down the Bull Put Spread

A bull put spread is an options strategy that profits if a stock trades above a certain price by a given expiration date. It’s constructed by selling a put option at one strike price while simultaneously buying a put option at a lower strike to cap potential losses.

The upfront sale of the put option generates immediate income for the trader. This makes the position bullish initially, hence the “bull put spread” name. Purchasing the lower strike put serves as insurance in case the stock does decline sharply.

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Crunching the Numbers for Nvidia

To set up a bull put spread for Nvidia ahead of earnings, we’ll first calculate the stock’s expected trading range based on option premiums. For the series expiring right after Wednesday’s report (February 23), the at-the-money put and call options are currently pricing in an 11.3% move from current levels.

Given Nvidia’s share price around $685 as of Tuesday morning, an 11.3% decline would take it down to around the $605 level. This is a good strike price to target for selling the put option that forms the bullish side of the spread.

Looking at the options chain, the $605 put expiring this Friday can be sold for around $8.75 per contract (remember each option contract covers 100 shares of the underlying stock). To cap risk, we’ll buy the $600 put for about $7.65.

The $1.10 difference in the two premiums is the maximum potential profit on the trade, equating to $110 per contract. This full profit would be realized if Nvidia finishes at or above $605 when the options expire.

Breaking Even and Managing Risk

On the downside, the trade has a maximum loss potential of $390 per contract. This worst-case loss would occur if Nvidia shares plummet below $600 by this week’s expiration.

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The beauty of spreads like this is the capped risk nature – a trader knows their exact maximum loss before even putting on the position. This allows for better risk management compared to naked option selling.

The break-even point to simply recoup the original outlay is $603.90, calculated as the $605 short put strike minus the $1.10 premium collected.

While a 28% return in just a few days (the $110 max gain divided by the $390 max loss) would certainly be attractive, traders also need to grapple with the possibility of 100% losses.

Given the binary, all-or-nothing nature of short-term bets like this, they’re really only suitable for experienced traders with high risk appetites. Less aggressive investors may prefer to hold off on spread positions until after Nvidia reports, then potentially pick up shares directly if the stock pulls back.

If assigned shares from the put spread, long-term investors could then look to sell covered calls against the stock to generate added income.

A Closer Look at Nvidia’s Rally

Regardless of this week’s earnings outcome, it’s hard to overstate Nvidia’s run as a market leader over the past year. According to research firm IBD, the chipmaker ranks #1 in its industry peer group. Its Composite Rating of 99, EPS Rating of 99, and Relative Strength of 98 all point to its stock being a standout.

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That said, Nvidia shares have gotten a bit extended amid the market’s broader rally. While a bullish earnings report could certainly justify its lofty valuation, investors shouldn’t rule out the potential for a pullback on any minor misstep either.

The key for near-term options players is Nvidia just has to stay above that approximate $605 level to profit on the bull put spread outlined above. If the stock does break down below there by the end of this week, the position would suffer max losses.

As always, options carry substantial risk and are not suitable for all investors. Any actual trade decisions should be made after thorough personal research and discussions with a qualified financial advisor.

What’s clear is that Nvidia has investors’ undivided attention heading into its earnings event. With the stock’s incredible run in 2023, traders are now eager to see if the latest results will validate that optimism – or if a long overdue breather is in store for the red-hot semiconductor name.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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