Options Trading: How to Play NVDA Earnings

Posted On August 15, 2018 2:22 pm

Chip maker Nvidia (NVDA) is set to report earnings after the close, and the options market is bracing for shares to move over 6% or about $15 up or down. I’m going to use an options trading strategy I’ve dubbed “the stack” to set up a low bullish play that can deliver over 150% return.

During 2017, NVDA was one of the top performing stocks, gaining some 95% that year.  So far 2018 hasn’t been too shabby either, with the stock up some 28 percent, but you can see the trajectory has slowed.

This stands in contrast to its main rival in graphic and AI chips, Advanced Micro Device (AMD), which lagged most of 2017 but has soared over 100% so far in 2018.  Most of AMD’s gains came in the past two weeks after it posted stellar earnings results.

I think tomorrow’s earnings will re-stablish NVDA as the premier chip maker with expected revenue growth over 40% and EPS growth north of 70%.  This should propel shares higher.

But the reaction to earnings, especially high p/e stocks can be notoriously fickle and good reports can sometimes be met with calls to ‘sell the news.’

I’m going to use a combination of calls to keep my cost down and risk limited, while retaining big profit potential.

The strategy is involved buying or going long a vertical call spread for a debit and simultaneously selling a strike vertical spread with higher strikes for a credit.

Think of  ‘stacking’ two spreads on top of each other, hence the name.

My plan is to buy the August 255/265 call spread and sell the 272.5/277.5 call spread, for an overall net debit of $3.75.

Here’s what an order ticket looks like:

A couple important points regarding the structure of this trade:

  • The width or spread between the debit spread is $10 wide –255 to 255 whereas the width between credit spread is just $5 wide—272.5 to 277.5. This ensure that if NVDA shares soar more than expected or above the top strike, I still have a nice profit.
  • There is separation between the two spreads—think of as pulling apart the body of a butterfly spread. This gives me a range in which I can achieve maximum profit.

In this case between $265 and $272.50, which about what the options are pricing in, the position will be worth $6.25.  That’s a whopping 166% gain —the value is calculated by 255/265 spread which is ITM and worth $10, minus the initial $3.75 cost.   The 272.5/277.5 spread will be out-of the-money and expire worthless.

Here’s the risk graph with the area of max profit highlighted.

Using this options trading strategy, you can stack NVDA earnings in your favor.

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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