Nvidia (NVDA) is set to report earnings on Wednesday after the close, with an expected move of around 5.5%. Nvidia stock is a member of Leaderboard that recently tested the 10-week moving average line.
The stock has stayed within the expected 5.5% range in four of the last five earnings announcements.
Let’s analyze how we can structure an option trade for Nvidia stock that fits the view that, first, we think Nvidia stock will stay within the expected range and, second, the response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the Aug. 20 expiration, we can see that the expected range is 5.5%.
Nvidia Stock: Bull Put Spread
Now that we know the expected range, let’s find a bull put spread that has the short strike roughly 5.5% below the stock price.
Selling the Aug. 20, 185-strike put and buying the 180 put would create a bull put spread.
This spread was trading for around $0.42 Monday. That means a trader selling this spread would receive $42 in option premium and would have a maximum risk of $458.
That represents a 9.17% return on risk between now and Aug. 20 if Nvidia stock remains above 185.
If Nvidia stock closes below 180 on the expiration date, the trade loses the full $458.
The break-even point for the bull put spread is 184.58, which is calculated as 185 less the 0.42 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings.
A 9% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with a high risk tolerance. Remember, options are risky. Investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
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