Nvidia (NVDA) is on my radar today and the trade I’m looking at has no risk on the upside, some income potential and a healthy profit zone on the downside. The strategy we’ll use for Nvidia stock is called a broken-wing butterfly. We’ll use puts because the short strike will be below the stock price. This helps reduce assignment risk.
With a regular butterfly option trade, the wings are placed an equal distance from the short strike, but with a broken wing butterfly we leave a larger gap on a particular side. This results in less risk on one side and more risk on the opposite side.
The Broken-Wing Butterfly On Nvidia Stock
Let’s take a look at how a broken wing butterfly trade might be set up on Nvidia stock.
Buy 1 Nov. 21, 145 put @ 2.00
Buy 1 Nov. 21, 155 put @ 3.55
Buy 1 Nov. 21, 160 put @ 4.70
Notice that the upper-strike put is 5 points away from the middle put and the lower-strike put is 10 points away.
This broken wing butterfly trade can be placed for a slight credit of around $40, which means there is no risk on the upside.
If Nvidia goes up from here, the worst that can happen is all the puts expire worthless leaving the trader with a $40 return.
What if Nvidia goes down? Depends on how much. The ideal scenario is that Nvidia trades between 155 and 160 at expiration. Once it gets below 160, the profit potential increases until 155 where the trade would see a maximum profit of $540 at expiration.
As Nvidia falls below 155 at expiration the profits start diminishing until a breakeven of 149.60. If it falls further than that, a maximum loss of $460 is possible if Nvidia trades below 145. However, this is still a risk-defined trade and so a trader won’t lose more than $460 on the trade no matter how low the stock falls.
Chip Giant’s Ratings At IBD
The trade starts with delta of 3, so has a very slight bullish bias to start, but that will flip to negative delta closer to expiry if the stock is still above 160.
In terms of risk management, I would set a stop loss if NVDA broke below 155 and a profit target of 10-15%.
Investor’s Business Daily gives Nvidia stock high ratings. With a best-possible Composite Rating of 99, an Earnings Per Share Rating of 99, and a Relative Strength Rating of 87. According to IBD Stock Checkup, Nvidia ranks first in its group.
Nvidia is due to report earnings in late-November, so this trade should not have any earnings risk.
This article is for education purposes only and not a trade recommendation. Remember to always do your 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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