Strategic Cash-Secured Put Option Guide for Nvidia Investors

What is happening with Nvidia?

The weak US jobs data last Friday worried investors, as higher-than-expected unemployment rate of 4.3% caused fears of a sudden economic downturn. At the same time, AI related stocks are facing pressure in the second half of 2024, as investors are starting to question the impact of substantial AI investments after recent disappointing forecasts from major tech companies.

Nvidia’s sharp decline was also attributed to a report that its next generation Blackwell B200 chip would be delayed by at least 3 months due to a design flaw. According to Barron’s, the delay would shift the expected revenue impact from late 2024 to early 2025. However, despite the reported delays of Blackwell chips, Nvidia’s projected 39% year-over-year growth in 2025 remains intact.

While Nvidia navigates current setback and the broader market correction, it remains as a key player at the forefront of the AI race. Investors who believe in the company’s fundamentals and long-term potential may see the dip as an opportunity to accumulate Nvidia shares amid the storm.

What can you do?

Investors looking to increase their stake in Nvidia and wish to earn some income but feel that there could still be some downside in the short term may consider selling cash-secured put options on Nvidia. This strategy allows investors to potentially acquire Nvidia shares at a lower price while earning a premium. Investors must set aside the cash required to purchase the stock if the option is exercised.

Illustration:

1. With Nvidia’ stock price at $100.45 on 5 Aug 2024, selling a put option with a $90 strike price (if you are comfortable buying your Nvidia shares at $90) for 1-month expiry (31 days) will yield a total premium of $615.00. ($6.15 x 100 shares).
2. This gives an annualized yield of 71% (6.15/100.45) x (360/31).
3. If Nvidia’s price stays above the strike price of $90 at expiry, the option will expire worthless, and the investor gets to keep the premium with no additional obligations.
4. If Nvidia’s price falls below the strike price of $90 at expiry, the investor is obligated to buy 100 shares at $90. The investor still gets to keep the option premium and owns the stock at a price that they were comfortable buying at.

Note:

1. Please note options trade in lot sizes of 100 shares. When an investor sells 1 lot of put option, they are selling a put option on 100 shares.
2. If the investor wishes to receive a higher premium, the investor could choose an option with a similar strike price and a longer expiry.
3. If the investor is only willing to buy the stock at a lower price but still want to receive a relatively similar premium, the investor could choose an option with a lower strike price and a longer expiry.

Advantages of Cash-Secured Puts

1. Generates passive income. Selling a cash secured put option generates an income via premiums that can supplement the overall return of a portfolio.
2. Recurring income. Investors can repeatedly sell cash secured puts on the same stock, generating recurring income as long as the stock stays above the strike price.

Risks of trading Cash-Secured Puts

1. Potential losses. If the stock price falls significantly below the strike price, investors may be obligated to buy the stock at a higher price than its current market value, minus the premium earned.
2. Early assignment. Investors may be assigned the stock before the expiration date, especially if the stock price falls significantly below the strike price. It is important to set aside adequate cash to take delivery of the stock at all times.
3. In the example above, it is possible that the stock falls well below $90 before the expiry but on expiry stays above $90. Without the option, the investor might have bought the stock below $90 but because of the cash-secured put option, the investor might miss out on the eventual upside of the stock.

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 Risk Warning, you will find more information on leveraged products and the associated risks. Trading in financial instruments carries risk and may not be suitable for you. Please refer to Saxo Capital Markets’ full Disclaimer here.