Consider This Bull Put Spread Strategy to Chase High of NVDA?
On June 10, $NVIDIA Corp(NVDA)$ closed at $121.79 per share, up 0.75%, with a total market value of $3 trillion.
On June 7, Nvidia's price was $1,208.88 per share. This shows that Nvidia's stock split has been completed.
In the past year, driven by strong earnings and future expectations, $NVIDIA Corp(NVDA)$ 's stock price has increased by more than 200%, making the company the second largest company in the world by market value. As of now, $Microsoft(MSFT)$ , which ranks ahead of Nvidia, has a total market value of $3.18 trillion; $Apple(AAPL)$ , which ranks behind Nvidia, has a total market value of $2.96 trillion.
Since Nvidia announced that it would trade at a ratio of 10 shares to 1 share, its stock price has risen by more than 27%.
For companies such as $NVIDIA Corp(NVDA)$ whose performance continues to exceed expectations and whose stock prices have skyrocketed, many investors who have not participated in the past will consider buying after the stock split.
But investors usually have a fear of heights, fearing that after chasing highs, the stock will start to fall back, causing themselves to suffer heavy losses.
At this time, investors can use the bull put spread strategy in the option strategy to solve the problems encountered in "chasing high".
1.What exactly is the bull put spread strategy?
The bull put spread involves selling a put option and buying another put option (for the same underlying asset) with the same expiration date but a lower strike price. Since the premium of selling a put option is higher than the premium of buying a put option, investors usually receive a net premium.
When investors expect market prices to rise, but the increase is limited, and investors do not want to bear the consequences of a market crash, they can use the bull put spread strategy.
Why Use a Bull Put Spread?| Medium
What are the functions of the bull spread strategy?
Earn premiums with low risk: When investors want to earn premium income, the bull put spread strategy is ideal, with a lower risk than selling put options.
Buy stocks at a lower price: The bull put spread is a good way to buy the desired stocks at an effective price lower than the current market price.
Profit in a volatile market: When the market falls, since selling put options has huge risks, bull put spreads can make profits in a volatile market by limiting downside risks.
2.Application of bull spread strategy on NVIDIA
Before the US stock market opened on June 11, Beijing time, NVIDIA's closing price on the previous trading day was $121.6. After the stock split, if investors expect it to trade at a maximum of $140 within a month, but he is also worried about NVIDIA's potential downside risks.
Therefore, the trader sold a put option with a target price of $140, with an expiration date of July 12, a transaction price of $19, and a premium of $1,900.
At the same time, a put option contract with a strike price of $120 was bought, with a transaction price of $5, and a premium of $500, which also expires on July 12.
Source: Tiger Trade
When the strategy is set up, since each option contract represents 100 shares, the option trader's net premium income is: (19-5) × 100 = $1,400.
When the option expires one month later, the loss is greatest when the stock price is below the long put option, which is $120. Conversely, the greatest gain occurs when the stock is trading above the $140 put option strike price.
The maximum gain of the strategy = the premium received, which is $1,400, that is, no matter how much the stock price rises, the maximum gain is locked in, up to $1,400.
The maximum loss of the strategy = the difference between the strike prices of the put options (i.e. the strike price of the short put minus the strike price of the long put) - the premium received, which is (120-140) × 100-1,400 = $600, no matter how much Nvidia's stock price falls, the loss is locked in.
In this strategy, if $NVIDIA Corp(NVDA)$ rises moderately, investors will not miss out on profits even if there is a guaranteed loss. If you are right in chasing Nvidia, you can earn $1,400, but if you are wrong, you will only lose $600. The bull market put spread perfectly solves the psychological problem of investors worrying about being trapped by chasing high prices.
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