Short Nvidia, Long NVDY To Take Advantage Of Option Market Euphoria

seekingalpha02-22

The YieldMax NVDA Option Income Strategy ETF offers exposure to Nvidia Corporation stock while providing monthly income from the sale of call options.Investors can lock in high option premiums by ...

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}\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nShort Nvidia, Long NVDY To Take Advantage Of Option Market Euphoria\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-02-22 22:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4672325-short-nvidia-long-nvdy-to-take-advantage-of-option-market-euphoria><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The YieldMax NVDA Option Income Strategy ETF offers exposure to Nvidia Corporation stock while providing monthly income from the sale of call options.Investors can lock in high option premiums by ...</p>\n\n<a href=\"https://seekingalpha.com/article/4672325-short-nvidia-long-nvdy-to-take-advantage-of-option-market-euphoria\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00BMPRXR70.SGD","symbol_name":"Neuberger Berman 5G Connectivity A Acc 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Justin Sullivan The YieldMax NVDA Option Income Strategy ETF (NYSEARCA:NVDY) offers exposure to Nvidia Corporation (NASDAQ:NVDA) stock while capping any monthly upside in exchange for huge income payments from the sale of call options. Call option implied volatility is now back up near record highs as investors are positioned for further upside. This provides a great opportunity for Nvidia bulls to effectively lock in some profit by shifting to the NVDY to receive 3-4% monthly income while they wait for a pullback. For Nvidia bears like myself, I recommend buying NVDY and short-selling NVDA. This strategy should pay off under any scenario excluding a further melt up in the stock, which seems unlikely from these levels of valuation and sentiment. The NVDY ETF The ETF employs a synthetic covered call strategy consisting of three elements: 1: a synthetic long position in NVDA stock which involves buying call options and selling put options, providing the fund with investment exposure equal to approximately 100% of NVDA; 2: Short-selling call options with an expiration of one month or less and a strike price that is approximately 5%-15% above the then-current NVDA share price (out of the money) at the time of such sales; and 3: The ETF holds short-term US Treasury securities as collateral which also generate income. By selling short NVDA and buying the NVDY ETF, investors can benefit from extremely high option premiums, which are likely to average between 3-4% monthly, far exceeding the fund's 0.99% expense ratio. This strategy should be profitable if the NVDA rises gradually, trades sideways, or reverses to the downside, as any capital losses on NVDY would be offset by gains on the NVDA short position, leaving investors with the option income. Selling Calls Makes Sense As Options Markets Extrapolate The Rally Since its inception in May last year, NVDY has generated an impressive 50% income on an annualized basis, yet because its call option purchases have lost money during the stock's melt-up, it has underperformed the stock itself. However, call option implied volatility is now back up near record highs as optimism has surged surrounding the Nvidia Q4 earnings report and the stock's long-term potential. Performance of NVDA, NVDY, and NVDY Total Return Since May 2023 (Bloomberg) The interesting thing about the recent spike in implied call option volatility is that it has also spiked relative to put option volatility. Despite retreating over the past few days the call/put ratio remains elevated and in the past this has been a signal of a pause in the bull market. As seen in the chart below, the call/put ratio tends to spike after large moves in the stock as option traders, increasingly driven by retail buyers, extrapolate the bullish trend. NVDA 1 Month Call-Put Ratio And NVDA Share Price (Bloomberg) Further NVDA Strong Gains From These Levels Are Unlikely Given how overbought and universally loved the stock has become, the risk of another bullish catalyst has declined. The relative strength index is at 83 out of 100 and the stock is trading almost 70% above its 52-week average. Meanwhile, its price to sales ratio is once again touching 40x, just shy of the 45x multiple seen at the July 2023 peak, and 91% of Wall Street analysts have a buy recommendation on the stock. At 40x sales, NVDA stands out as being the most expensive stock in the S&P 500 (SP50) on this metric, and even on a forward basis which assumes a doubling in revenues over the next 12 months, it is still the most expensive stock. Of course, net profit margins are expected to be a staggeringly high 57% next year, so the forward P/E ratio seems more reasonable at 36x. However, this means that earnings are expected to exceed $50bn next year, making it the 4th most profitable stock in the S&P500 behind Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL). This does not mean that it cannot continue to rise further in the short term, or perform well over the long term, but sustained double-digit monthly gains is highly unlikely from current extreme levels. Renewed Optimism Around The NVDA Q4 Earnings Beat Is The Main Risk The key risk facing a long NVDY, short NVDA strategy is that we see another spike higher following Tuesday's earnings and guidance beat. The forward P/E ratio is likely to drop below 30x as analysts upgrade their expectations following stronger guidance, which is still high but has room to move higher. As we have seen from the recent behavior of Super Micro Computer Inc (SMCI), which has tripled since the start of the year, there is no limit to how far AI optimism can push up stocks. However, given that the NVDY sells calls that are already out of the money by 5-15%, the stock would have to become increasingly overvalued in order for it to continue underperforming NVDA. Furthermore, as we have seen in previous spikes, a further melt up would also raise implied volatility and increase option income for the NVDY.  Another risk is that NVDA's stock falls sharply, but it also has strong bear market rallies. As both the NVDA and NVDY would fall by equivalent amounts during sharp declines in the stock, but NVDY would underperform during any strong up moves, an aggressive bear market punctured by strong relief rallies could cause the NVDY to underperform. This has been the kind of behavior exhibited by Tesla (TSLA) since July 2023, when I adopted the same strategy. Despite a 30% decline in the stock since then, the YieldMax TSLA Option Income Strategy ETF (TSLY) has only outperformed by 2%. Therefore, being long NDVY and short NVDA may not be ideal for investors looking to get exposure to the downside.  Investors should also be aware of other risks when investing in derivatives, which are outlined in the summary prospectus, which could result in investment returns underperforming expectations. In addition, shorting stocks comes with its own risks that investors should be aware of. However, I believe the YieldMax NVDA Option Income Strategy ETF offers a great option for investors looking to earn high income while waiting for a more attractive entry point in Nvidia Corporation's stock.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2413421614"}