To The Moon

Overview

On July 11, 2024, I executed a vertical put option strategy on Nvidia (NVDA) $NVIDIA Corp(NVDA)$  , involving the sale of a put option with a strike price of $112 and the purchase of a put option with a strike price of $107, both set to mature on August 2, 2024. This strategy resulted in the collection of a premium of $38 per contract when NVDA's stock was trading at $134. However, by the end of the day, NVDA's stock had declined by 5.6%, closing at $127.40. This decline mirrored broader trends in technology stocks following the release of a cooler-than-expected consumer price index (CPI) for June.

The Strategy

A vertical put spread is a popular options strategy used to profit from the expectation that the underlying asset will remain above a certain price level by expiration. In this case, I sold the $112 put and bought the $107 put, anticipating that NVDA's stock would stay above $112 by the August 2 maturity date. The premium collected from this spread was $38 per contract, providing a buffer against potential losses and lowering the breakeven point of the investment.

Market Reaction

Despite the initial strong positioning, NVDA's stock experienced a notable decline to $127.40 by the end of the trading day. This drop was largely attributed to broader market reactions to the CPI data, which suggested a potential for interest rate cuts. However, it appears that NVDA's recent gains had already factored in such expectations, leading to a sell-off in technology stocks.

Analysis

The sudden decline in NVDA's stock price demonstrates the inherent volatility and unpredictability of the technology sector. The vertical put spread strategy still holds some value despite the drop:

Current Position: With NVDA trading at $127.40, it is still comfortably above the sold put strike price of $112. This means that, as long as NVDA remains above $112, the spread will expire worthless, allowing me to retain the $38 premium collected.

Risk Management: The bought $107 put provides a protective floor, limiting the maximum potential loss on this trade to $500 per contract (difference in strike prices) minus the premium received, effectively capping the risk.

Market Expectations: The CPI report indicates a possibility of interest rate cuts, which could eventually support a rebound in technology stocks, including NVDA. If NVDA stabilizes or recovers, the position could still be profitable.

Conclusion

The vertical put option strategy on NVDA, while temporarily impacted by broader market reactions, remains a viable investment. The stock’s decline to $127.40 still keeps the trade in a favorable position above the sold put strike price of $112. Moving forward, it is crucial to monitor NVDA's stock performance and broader market indicators, particularly those related to interest rates and inflation, to make informed adjustments if necessary. This strategy exemplifies the importance of risk management and the benefits of a well-structured options spread in navigating market volatility.

$NVDA VERTICAL 240802 PUT 112.0/PUT 107.0$