Nvidia (NVDA) had an impressive move Friday as it rallied 4.9% and closed near the high of the day. A member of Leaderboard since mid-April 2020, Nvidia stock is showing impressive ratings too, as seen in IBD Stock Checkup.
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The company is ranked No. 1 in its group and has a Composite Rating of 96, an EPS Rating of 97 and a Relative Strength Rating of 74.
An easy trade for beginner option traders with a bullish bias is a bull put spread.
Nvidia Stock: Setting Up The Bull Put Spread
To execute a bull put spread in NVDA stock, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Aggressive traders might place the trade close to the stock price, while conservative traders may prefer to be further out of the money.
Selling the July 16-expiration 640 put and buying the 635 put would act as an aggressive trade placement.
This spread was trading for around $2.30 Tuesday, ahead of Wednesday’s powerful gains. That means a trader selling this spread would receive $230 in option premium and would have a maximum risk of $270.
That represents an 85.2% return on risk between now and July 16 as long as NVDA stock remains above 640.
Controlling Risk
If Nvidia stock closes below 635 on the expiration date the trade loses the full $270.
The break-even point for the bull put spread is 637.70, which is calculated as 640 less the 2.30 option premium per contract.
This bull put spread trade has a delta of 2. This means it is a similar exposure to owning two shares of NVDA stock, although this exposure will change over time as the stock price moves.
With an aggressive trade like this, a stop loss won’t be overly effective. Either the trade works or it doesn’t.
With earnings set for the end of August, this trade should have no earnings risk.
Remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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