Nvidia’s Bull Put Spread Analysis Revealed Nvidia’s Bull Put Spread Analysis Revealed

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By Ronald Tech

Nvidia’s recent surge to over $700 has investors buzzing with excitement, celebrating the company’s remarkable performance. The stock broke the $700 barrier, a significant milestone in the company’s exceptional journey.

The Barchart Technical Opinion rating, an impressive 100% Buy, solidifies Nvidia’s dominance, currently ranking in the Top 1% of all short-term signal directions.

Long-term indicators provide unwavering support for the continuation of this upward trend. However, with the market residing in highly overbought territory, a word of caution is advisable regarding a potential trend reversal.

Analysts seem to concur, with 31 recommending Nvidia as a Strong Buy, while there are 3 Moderate Buy ratings and 3 Holds. The company continues to command respect, overcoming market challenges and reinforcing its position as a market leader.

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NVIDIA Corporation, renowned globally for its visual computing technologies, is the unrivaled pioneer of the graphic processing unit (GPU). From its roots in PC graphics, the company has now transitioned to providing AI-based solutions crucial for high-performance computing (HPC), gaming, and virtual reality (VR) platforms.

NVIDIA’s success with GPUs is attributed to their parallel processing capabilities, driven by thousands of computing cores necessary for running complex deep learning algorithms. These GPU platforms are pivotal in developing multi-billion-dollar markets such as robotics and self-driving vehicles.

The company’s dominant presence in the Data Center, professional visualization, and gaming markets positions it in stark contrast to Intel and Advanced Micro Devices, the latter playing catch-up roles. Notably, Nvidia’s partnerships with major cloud service providers and server vendors serve as key catalysts, underscoring the company’s strategic positioning in the industry.

Amidst this stellar backdrop, we delve into the intricacies of a bull put spread trade – a bullish initiative that can also benefit from a drop in implied volatility.

Understanding the Bull Put Spread

A bull put spread trade is a strategic move that capitalizes on a bullish market outlook while latching onto the potential gains from a decrease in implied volatility. The maximum profit from a bull put spread is confined to the premium received, with the maximum potential loss also curbed within defined limits. To calculate the maximum loss, one simply subtracts the premium received from the difference in the strike prices of the long and short options.

Diving further into Nvidia’s situation, the current implied volatility sits at a notable 54.21%, presenting Nvidia with an IV Percentile of 82% and an IV Rank of 61.29%. With Nvidia’s expected move standing at approximately 5.19% before February 16, the options market foresees a potential downside, pegging NVDA stock at roughly $665.

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To execute a bull put spread, we suggest selling an out-of-the-money put and then purchasing a put even further out-of-the-money. In this case, selling the February 16 put with a strike price of $665 and acquiring the $660 put would set the stage for a bull put spread.

The Numbers Behind the Trade

The said spread was trading at approximately $0.85, signifying that a trader engaging in this spread would receive $85 in option premium and shoulder a maximum risk of $415. This equates to a return on risk of 20.48% between the present and February 16 if NVDA stock remains above $665.

It’s crucial to note that if NVDA stock closes below $660 on the expiration date, the entirety of the $415 is forfeited. The breakeven point for the bull put spread stands at $664.15, calculated as $660 less the $0.85 option premium per contract.

This trade confers immunity from earnings risk, as Nvidia is set to report earnings on February 21st, a factor which should be taken into consideration while weighing the trade’s potential.

Conclusion and Risk Management

Risk management in a bull put spread can be effectively executed based on the premium received. In this instance, the premium stands at $85, suggesting a viable option to set a stop loss equivalent to the premium received, thereby limiting potential losses to approximately $85.

An alternate approach to managing the trade involves setting a specific point on the chart for potential adjustment or closure, with $675 illustratively signaling the threshold for such a course of action.

It’s imperative to remember that options inherently pose risks, and investors should remain mindful of the potential to incur a total loss of their investment. This article is intended purely for educational purposes and should not be misconstrued as a trade recommendation. Always conduct comprehensive due diligence and seek counsel from your financial advisor before embarking on any investment decisions.

For further insight into the stock market, you might be interested in perusing more Stock Market News from Barchart.