Look For Pullbacks in NVDA

Not sure if you have heard about a little, old stock called NVDIA (NVDA). It has been the talk of the market for several weeks now. The stock has moved vigorously higher for quite some time, especially since the beginning of this year. Then the company announced a 10 for 1 stock split, which pushed its stock even higher before and again after the split. But as we know, stocks do not go higher forever, and recently the stock pulled back. As an option trader, this is a chance to take advantage of.

Bull Put

In this daily chart of NVDA toward the end of June, you can see the stock had quite the run higher before pulling back several days. In addition, you can see there is some potential support from previous resistance around the $115 level. This could be a great opportunity to take advantage of an expected hold of that level or a reversal back higher.

With four days left until expiration, an option trader could sell a bull put spread at the $115 level. Looking at the option chain below in MTM’s group coaching class, we modeled out a 113/115 spread (selling the 115 put and buying the 113 put). The spread produced a credit of 0.57 (2.01 – 1.44), which in real terms is $57. That is the trader’s to keep if those put options expire worthless, and they would if NVDA closed at $115 or higher on expiration. The max risk was 1.43 (2 – 0.57), which is the difference in the strikes minus the credit received, or $143 in real terms.

On Cue Rally

As we expected based on what we saw on the chart (pullback and potential support), shares of NVDA rallied over the next two days as seen below. I always ask traders to look at a chart and determine what has a better chance of happening? In this case, there was a much better chance the stock would rally, even if only temporarily, and it did.

The positive delta and positive theta dropped the spread’s premium as seen below. The spread could now be bought back for 0.07 (0.22 – 0.15) or $7 in real terms. That would leave the option trader with a profit of 0.50 (0.57 – 0.50) or $50 in real terms. Not too bad!

Final Thoughts

There was no guarantee NVDA would rally. But based on an extended move lower and potential support just below, it certainly had better odds of doing so. Being able to take advantage of situations that present themselves and keeping things simple as far as an option strategy goes, as we did with the one above, can be the keys to your success as an option trader.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

Share This Post:


Leave a Reply

Your email address will not be published. Required fields are marked *