Nvidia (NVDA) is one of the strongest stocks in the market, with a Composite Rating of 99, an EPS Rating of 98 and a Relative Strength Rating of 94.
Monday, Nvidia stock closed back above the 50-day moving average, which is a crucial level for bulls to defend.
Nvidia reports earnings on Wednesday, which means volatility is elevated, with an implied volatility percentile of 52. Implied volatility percentile measures where the current level of implied volatility sits in relation to the last 12 months.
Higher volatility results in higher option premiums, which can be good for bull put spread traders.
A bull put spread is a defined-risk option strategy that profits if the stock closes above the short strike at expiration.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
With the 50-day moving average around 528, traders could look to place the bull put spread just below that level.
Bullish Nvidia Stock Option Trade
Traders who think Nvidia stock will not drop below the 50-day moving average could look to sell a Nov. 20-expiring put with a 520 strike price and buy a Nov. 20 515-strike put.
As of Monday, this spread was trading for around $1.65, which means a trader selling this spread would receive $165 in option premium and would have a maximum risk of $335.
That represents a potential 49.25% return on risk in two days as long as Nvidia stock remains above 520.
If Nvidia stock closes below 515 on the expiration date, the trade loses the full $335.
With this being such a short-term trade, there is no chance to adjust the trade if it goes bad. Trading options over earnings can be risky so for that reason, keeping position size small is a good idea.
I view these as fun trades that either work or they don’t, and you have to be prepared to take the full loss if the stock drops.
It’s important to remember that options are risky and 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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