Strategic Call Option Plays for Nvidia Investors Strategic Call Option Plays for Nvidia Investors Strategic Call Option Plays for Nvidia Investors

Strategic Call Option Plays for Nvidia Investors

Chun Fei Lin

Sales Trader

Summary:  Nvidia's stock has rebounded significantly, surging 22% from a recent low and adding nearly $480 billion in market capitalization. Despite a recent significant drop in stock value, Nvidia remains dominant in the market for data center accelerators driving complex AI-related tasks. Investors with a long-term stake in Nvidia can consider reducing risk while maintaining exposure by selling Nvidia stock and purchasing an equivalent exposure of call options on Nvidia. This strategy allows for retaining exposure to Nvidia while reducing capital outlay and risk, offering limited risk, leverage, and potential for asymmetrical gains, but also subject to the risks associated with options trading.


What is happening with Nvidia?

Nvidia's stock rebounded from a selloff two weeks ago, surging 22% from the recent low of $756 and adding nearly $480 billion in market capitalization. The rally follows major AI investments pledged by key clients such as Meta, Alphabet and Microsoft that amount to billions of dollars

The move is a sharp reversal from the 10% drop on 19 April which was the shares' most significant decline in over four years. This was driven by worries that the excitement around chipmakers had exceeded the actual situation, particularly after Taiwan Semiconductor Manufacturing Co. revised its expansion outlook downward.

Nvidia still holds a dominant position in the lucrative market for accelerators that drive data centres handling complex AI-related computing tasks. The stock has experienced a substantial 239% increase in 2023 and has risen 89% year-to-date. Nvidia will release its earnings report on May 22 2024.

What can you do if you are long Nvidia?

Investors who have a long-term stake in Nvidia and looking to reduce risk while maintaining the same exposure in Nvidia can sell Nvidia stock and buy the equivalent exposure of call options on Nvidia. This strategy enables the investors to retain exposure to Nvidia while reducing capital outlay and risk.

Steps:

1. With Nvidia’s stock price at $905 on 7 May, sell 100 shares of Nvidia and received $90,500 ($905x 100 shares). Then, buy 1 unit of call options (100 shares) at the strike of $905 with 1-month expiry (7 Jun 2024), you paid a total premium of $6,545 ($65.45 x 100 shares).
2. 
Investor spends 7.2% ($6,545/$90,500) of the capital to maintain the same 100 shares of Nvidia exposure.
3. 
If Nvidia’s price rises above $905 strike price (in the money) at expiry, the investor may choose to exercise the right to buy 100 shares of Nvidia at $905 or sell to close the call option and take profit.
4. 
If Nvidia’s price rises during the course of the option, then the value of the option will also rise enabling investors to book profits if they believe the full upside of the stock is fully realized at any stage of the option tenure.
5. 
If Nvidia’s price falls below $905 strike price (out of the money) at expiry, the option may expire worthless, and the investor loses the total premium.



Nvidia Long call option

Advantages of long calls

1. Limited Risk. Investors can't lose more than the premium you paid for the option.
2. 
Leverage. With a small amount of money, you can gain a much larger exposure in the stock.
3. 
Potential for asymmetrical gains. If the stock price goes up, you can make the same amount of money with limited risk.
4. 
Flexibility. You can benefit from a stock's potential rise without having to buy the stock outright.

Risks of long calls

1. Long call options have a finite lifespan and will lose value over time, particularly if the stock price does not rise above your option strike. If the stock price does not rise above the option strike by expiry, the option will expire worthless.
2. 
Fluctuations in the stock price can increase the risk associated with long call options, leading to significant changes in the option's market to market value.
3. 
If the stock price doesn't go above the strike price before the option’s expiry, you might lose all the premium you paid for the option.
4. 
Long call options are also subject to the influence of macroeconomic factors that can impact stock prices, including interest rate movements, significant events, and major economic shifts.


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 Capital Markets' 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 Capital Markets' website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.


Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992