It’s never black or white with the market. But when it’s “red followed by green” on the price chart of Nvidia Corporation (NASDAQ:NVDA), this strategist recommends bullish investors use the NVDA options market for well-calculated long exposure instead of buying Nvidia stock. Let me explain.
According to some market pundits, issues like Apple Inc.’s (NASDAQ:AAPL) woes, China trade war concerns and today’s much more volatile and erratic cryptocurrency market can all be fingered as reasons why investors should stay away from Nvidia stock. But there’s always two sides to every story, especially when it comes to investing. And high-flier NVDA is no exception.
Think of the possibilities, with secular trends for IoT, artificial intelligence, gaming, autonomous driving or even the connected home. If you’re a buyer of those markets, Nvidia — whose chips are leaders in all those areas — should sound attractive. And if you look at the NVDA price chart, there are new reasons to see shares as a good deal more compelling than just a couple weeks ago.
Nvidia Stock Weekly Chart
I don’t know about what kind of difference a day actually makes. Sometimes though, a couple weeks can be important enough to recognize a fluid market and potentially changing technical conditions. This appears to be the case for Nvidia stock right now–and that’s good news for bulls.
Since last writing cautiously about NVDA’s downside potential, shares have established a fairly constructive base-on-base pattern. The formation is the result of two corrective moves of 18% and 17% stacked on top of one another over the past several weeks.
At the end of the day or actually weeks, corrections can be price or time-based or a combination of both in producing a healthy period of unwinding bullish excesses. Personally, I generally like to see deeper price-based corrections which approach 30%. However, patterns like Nvidia’s should be respected or investors risk falling victim to potentially costly biases.
Lastly, with stochastics in a fairly supportive position for higher prices and shares having confirmed the corrective low with a bullish two candle, “red followed by green” reversal pattern — it’s time to shift gears and approach Nvidia stock with a bit more optimism.
Nvidia Stock Modified Bullish Butterfly
One spread combination favored for this type situation, where I’d like to see pattern follow-through while staying away from increased downside exposure in the event our technical hypothesis fails, is a bullish modified butterfly combination.
By positioning the spread above the current share price in Nvidia and designing the embedded bear call spread tighter than the closer-to-the-money bull call spread, this bullish trader enjoys the benefits of a lower cost, limited and reduced risk strategy.
Additionally, this spread eliminates the potential headache of NVDA shares overshooting the spread and resulting in a loss. And with earnings in the second week of May, that’s a risk which should be addressed. Profits would be smaller in that type scenario, but the trader avoids the potential problem of using a regular butterfly as a moderately bullish way to position.
Reviewing the NVDA options market, the long May $245/$260/$270 call butterfly combination is attractive. With shares at $228.71 the spread is priced for $2.50 or just over 1% of the risk assumed with holding shares of Nvidia.
Despite the fairly insignificant downside risk, especially during an earnings cycle, there is a max profit of $12.50 or 500% if Nvidia stock rallies and settles at $260 on expiration. That’s nice. And in a more realistic but sometimes overly bullish world, if shares continue to push through $270, there’s still a profit of $2.50 to be captured. That’s a bit less nice, but in this strategist’s opinion, locking in a 100% return if bulls do go hog wild while keeping your you-know-what covered on the downside sounds like a solid play in NVDA.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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