Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Short Strangle Option Strategy on NVIDIA Corp (NVDA)
Execution
- Sell to Open 1 19-Jan-2024 595 Call @ $7.85
- Sell to Open 1 19-Jan-2024 420 Put @ $9.40
Premium and Risk
- Net Premium Received Per Option: $17.55 (credit)
- Total Premium Received: $1,755.00 USD
- Max Risk: Unlimited due to the naked call
- Margin Impact: €2,372.13
- Upper Breakeven Point: $612.55
- Lower Breakeven Point: $402.45
Rationale
The trader is utilizing a neutral strategy, anticipating NVDA to stay within a specific range until expiration (63 days from now). As this is more of an income strategy, the time frame is a little shorter than the other strategies in this article.
Strategy Summary
This strangle strategy reflects a neutral stance on the market, with the goal of profiting from NVDA's stock staying between the breakeven points.
If you have the underlying stock, you could view this strategy as a way to catch extra yield on the stock: $1755.- credit received on a capital of $49179.- (based on the current value of the stock * 100 for 1 contract) = 3.57% over a period 63 days. If the price of the stock moves outside the breakeven points, you have the underlying stock to cover these excess moves. Having the underlying stock alters the strategy from undefined to defined risk. Do take into account, that once you're using your stock as cover, this will limit the potential upside of your investment at the upper-strike price of the strangle. On the downside, if you don't have enough cash to cover an assignment of the put, you will have to sell your existing stock to cover that position, possibly resulting in extra loss.