Nvidia’s stock options trade offers an 8% discount as it attempts to strengthen the stock
Nivea (NVDA) is a high-volatility stock that returns above its 50-day moving average.
Nvidia is a leading designer of graphics processing units (GPUs) for the gaming, professional viewing, data center and automotive markets.
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What is a cash guaranteed deposit?
On Tuesday, the stock closed up more than 2%.
Among policy developments, investors saw President Donald Trump’s rescinding of an earlier executive order on artificial intelligence as a move to relax AI regulations. That could benefit chipmakers like Nvidia.
Nvidia Cash is a secure transaction
One way to acquire stock ownership at less than the current price is through cash-backed put option trading.
Let’s take a look at how a cash-backed trade-in looks at Nvidia.
This type of trade involves writing an in-the-money or out-of-the-money option and allocating enough cash at once to buy the stock.
The goal or put is to make the stock worthless and retain the premium, or get the stock below its current price.
Anyone selling should understand that they may be allotted 100 shares at the strike price.
Now let’s assume we are happy to buy 100 shares of Nvidia stock at 132 between now and February 21st.
On February 21st, selling the 132 strike would result in a premium of around $250. If the short seller is called by the buyer, he is obligated to buy 100 Nvidia shares at 132.
The price paid for the trade is the strike price less the premium received. In this case, that gives an actual value of 129.50. This is 7.94% below Tuesday’s closing price.
Nvidia’s business can return 23% annually.
If the stock lasts longer than 132 when it expires, the deposit will be void. That gives the trader a 1.93% return on capital at risk. That works out to about 23% per year.
The main risk with trading is the same as owning stocks. If the stock falls significantly, the business will suffer losses. However, the premium received partially covers the loss.
The maximum loss on the trade would occur if NVD falls to $0, which would result in the trade losing $12,950. But most traders cut their losses before then.
Cash positions are a fantastic way to make a good return on a stock that the trader is happy to own.
If the deposit is allocated, the investor takes ownership on a reduced cost basis. Traders can start selling covered calls to generate additional income from the position.
Nvidia Leads Industry Group
According to IBD’s Stock Check, NVD is ranked No. 1 in its industry group. It has a composite rating of 99, an EPS rating of 99 and a relative strength rating of 93.
It is important to remember that options are risky and investors can lose 100% of their investment.
This article is for educational purposes only and not for business advice. Always remember to do your own due diligence and consult your financial advisor before making any investment decision.
Gavin McMaster has a Masters in Applied Finance and Investments. He focuses on income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter. @OptiontradinIQ
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