Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Implied volatility and post-earnings price movement

A key factor after an earnings release is implied volatility (IV)—a measure of market expectations for future price movements. Nvidia, being a highly influential stock, typically sees elevated IV ahead of earnings. However, once earnings are out, implied volatility tends to drop significantly, causing a decline in option prices.

As of today:

• Implied Volatility: 64.11% (down 6.07%)
• IV Percentile: 88%
• IV Rank: 54.13%

The covered strangle: yield enhancement for Nvidia holders

For investors who already own Nvidia shares and believe the stock will experience moderate price swings over the next three weeks, a covered strangle strategy can be considered. This strategy involves selling both a call and a put, earning option premiums while keeping the underlying shares.

Structure of the trade:

• Sell the $150 call (March 21, 2025 expiry) → If NVDA rises above $150 at expiration, shares will be sold at that price.
• Sell the $115 put (March 21, 2025 expiry) → If NVDA falls below $115 at expiration, additional shares will be acquired at that price.
• Total premium received: $5.70 per share (~$570 per contract)

Key benefits and risks

• Generates additional income from selling options.
• Allows participation in stock movement while collecting premiums.
• If NVDA remains between $115 and $150 at expiration, both options expire worthless, and the premium is fully retained.
• If NVDA drops below $115 at expiration, investors must buy additional shares. However, since the premium received lowers the effective cost, the actual purchase price will be $109.30 ($115 - $5.70), reducing the overall expense of acquiring new shares.
• If NVDA surges past $150 at expiration, shares will be called away, capping upside gains. However, if you do not want to lose your stock, you can close your call position by buying it back at a loss. This means you will secure the capped profit you knew upfront but will forgo any further upside until the moment you close your call position—while still retaining ownership of your shares.

Why now? Capitalizing on post-earnings volatility drop

Since IV tends to fall post-earnings, option prices are lower than pre-earnings levels. However, this strategy uses pre-market closing prices, meaning actual premiums at open will likely be lower. It’s important to factor this in when structuring the trade.

Alternative strategies for different outlooks

If an investor has a strong directional view on Nvidia, alternative strategies might be more suitable:

1. Bullish Alternative: Bull Call Spread
   • Buy a call with a lower strike and sell a higher strike call.
   • Allows leveraged upside exposure while limiting risk.
   • Best for: Investors expecting a breakout but wanting to control risk.
2. Bearish Alternative: Buying Puts
   • Buy a put option to gain downside exposure.
   • Since IV drops post-earnings, put prices will be lower, making it better to wait for further declines.
   • Best for: Investors concerned about downside risk.

Final thoughts: generating extra yield with a covered strangle

For Nvidia shareholders looking to generate extra returns without fully exiting their position, the covered strangle is a viable option in this post-earnings environment. It provides premium income while allowing flexibility in stock price movements. However, investors should carefully assess their risk tolerance and willingness to acquire additional shares or have existing shares called away.

If you’re interested in maximizing the efficiency of your portfolio, exploring strategies like these can provide additional income opportunities in the short term while maintaining long-term investment objectives.