Recently investors have been on pins and needles over the headlines coming out of the White House regarding the potential global tariff wars. The bottom line is that we are getting mixed messages which in turn creates confusion. This is the definition of uncertainty so the real threat is to temporary stock prices not stock fundamentals.
So great stocks are getting punished to no fault of their own. Case in point, Nvidia Corporation’s (NASDAQ:NVDA) has fallen 10% in two weeks since it set a new all time high mid-June. This is not because its fundamentals suddenly deteriorated but because of a flip in general sentiment in equities.
This morning, the White House dialed the combative rhetoric down a bit so stocks are likely to bounce. My trade today will benefit from a rally but does not need one to profit. I do believe that for the long term, NVDA stock will be higher but for now, I am more certain that the recent support will hold and therein lies my opportunity.
Instead of buying the shares at face value and risk $242 without any room for error, I use NVDA options where I can build a moat around my risk so I can profit even if the stock falls. In essence I collect a premium to open the trade.
If price goes against me then I will own shares but a deep discount from current price. I welcome this worst case scenario with open arms and that is critical to my style of trading.
Fundamentally, NVDA is not cheap from a price to earnings perspective. But this is a growth stock I am less concerned with profitability for as long as they deliver the growth. Consensus is that NVDA is dominating several technical chip areas including AI and this is the future.
We now live in a world where almost all aspects of our lives depend on tech. Furthermore, the tech adoption rate is exponential so the demand will increase with time. NVDA will benefit from that for years to come.
Two NVDA Trade Ideas
Technically, this most recent dip tested a pivot point and there are several other levels below it. These tend to be support on the way down. The 210 and 180 per share were two such breakout areas that will lend support if the uncertainty were to linger.
The bottom line is that NVDA is a momentum stock with perceived frothy valuation. So It won’t give us a clear entry point. But a dip of 10% on extraneous headlines is a gift entry spot for future profits.
The Trade: Sell NVDA DEC $185 put and collect $5.25 per contract to open. I have a 85% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $179.75.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell NVDA DEC $185/$180 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade require a rally to profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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