Investing with options: Nvidia - 3 long term scenarios Investing with options: Nvidia - 3 long term scenarios Investing with options: Nvidia - 3 long term scenarios

Investing with options: Nvidia - 3 long term scenarios

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  This article provides a deep dive into three potential long-term scenarios for Nvidia, a titan in the technology sector. It explores distinct options strategies for each scenario, providing investors with a comprehensive toolkit to navigate Nvidia’s future.


Investing with options: Nvidia - 3 long term scenarios

In the ever-evolving world of technology, Nvidia stands as a titan, its influence extending not only to AI-related stocks but also the entire US technology sector. As Nvidia prepares to report its earnings results on Tuesday after the US market close, the anticipation is palpable. Analysts and investors remain bullish on the outlook, yet recent developments from Microsoft and Tencent suggest a potential dip in demand in the medium term. Microsoft is forging ahead with its own purpose-built AI chips, expected to be delivered as early as next year, and Tencent’s recent acquisition of a significant inventory of AI chips from Nvidia hints at a possible frontloading of demand.

Related article: Earnings preview Is the Intel moment coming for Nvidia

Against this backdrop, it becomes crucial to explore the potential trajectories that Nvidia could follow in the long term. In this article, we will delve into three such scenarios, each accompanied by a distinct options strategy. These strategies, designed for use over an extended timeframe, will provide investors with a comprehensive toolkit to navigate the potential twists and turns in Nvidia’s journey. Stay tuned as we unpack these scenarios and strategies, using the insights from the referenced article as our starting point. Let’s embark on this exciting exploration of Nvidia’s future.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

 

Bullish outlook

Long Call Option Strategy on NVIDIA Corp (NVDA)

Execution

  • Buy to Open 1 20-Dec-2024 470 Call @ $115.50

Premium and Risk

  • Premium Paid Per Option: $115.50 (debit)
  • Total Premium Paid: $11,550.00 USD
  • Max Risk: The premium paid, $11,550.00
  • Margin Impact: $0.00 EUR
  • Breakeven Point: $585.50 

Rationale

The investor has a bullish outlook, expecting NVDA to rise above $585.50 by expiration.

Strategy Summary

The investor employs a bullish strategy with a long call, accepting the risk of the premium for the chance at unlimited profit.

Short Strangle Option Strategy on NVIDIA Corp (NVDA)

Execution

  • Sell to Open 1 19-Jan-2024 595 Call @ $7.85
  • Sell to Open 1 19-Jan-2024 420 Put @ $9.40

Premium and Risk

  • Net Premium Received Per Option: $17.55 (credit)
  • Total Premium Received: $1,755.00 USD
  • Max Risk: Unlimited due to the naked call
  • Margin Impact: €2,372.13
  • Upper Breakeven Point: $612.55
  • Lower Breakeven Point: $402.45 

Rationale

The trader is utilizing a neutral strategy, anticipating NVDA to stay within a specific range until expiration (63 days from now). As this is more of an income strategy, the time frame is a little shorter than the other strategies in this article.

 
Strategy Summary

This strangle strategy reflects a neutral stance on the market, with the goal of profiting from NVDA's stock staying between the breakeven points.
 
If you have the underlying stock, you could view this strategy as a way to catch extra yield on the stock: $1755.- credit received on a capital of $49179.- (based on the current value of the stock * 100 for 1 contract) = 3.57% over a period 63 days. If the price of the stock moves outside the breakeven points, you have the underlying stock to cover these excess moves. Having the underlying stock alters the strategy from undefined to defined risk. Do take into account, that once you're using your stock as cover, this will limit the potential upside of your investment at the upper-strike price of the strangle. On the downside, if you don't have enough cash to cover an assignment of the put, you will have to sell your existing stock to cover that position, possibly resulting in extra loss.

Protective Put Collar Option Strategy on NVIDIA Corp (NVDA)

Addendum (20 nov 2023): The strategy has changed (slightly) since its initial publication. The strategy didn't correctly mention the downside risk when using 2 puts rather than 1. This has been corrected. Our apologies for the confusion.

Execution

  • Sell to Open: 1x 20-Dec-2024 650 Call @ 55.50
  • Buy to Open: 1x 20-Dec-2024 420 Put @43.20

Premium and Risk

  • Net Premium Received: 12.60 USD (credit)
  • Total Premium Received: 1,260.00 USD
  • Max Risk: Unlimited due to selling a call (unless you have the underlying stock, which changes the naked call to a covered one)
  • Margin Impact: 3,745.35 EUR (if you have the underlying stock, the margin impact will be much lower)
  • Breakeven Point: $662.60 

Rationale

The trader is implementing a collar strategy to hedge a long position in NVDA stock. By selling a call, they receive a premium which partially offsets the cost of the put. This setup is typically used when holding the underlying asset and wanting protection against a downturn while capping the upside potential.

 
Strategy Summary

This collar strategy protects against a significant drop in NVDA's stock price with the purchased put, but also limits the upside gains by selling a call. It's a risk management tactic, trading off profit potential for downside protection. The actual risk and breakeven would depend on the price of the NVDA stock owned by the trader. This strategy suggests a neutral to slightly bullish outlook, willing to forgo some upside for protection.

 

Conclusion

In summary, we’ve explored three options strategies for Nvidia - a long call, a short strangle, and a protective put collar. Each offers unique benefits and risks, providing a range of tools for different market scenarios.


Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

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