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Smart Investor: 5 options strategies you can use for the upcoming Nvidia earnings
Options 10 minutes to read
Koen Hoorelbeke
Investment and Options Strategist
Résumé: This article explores five strategic options setups for smart investors who already own or are considering owning Nvidia stock ahead of its upcoming earnings. Each strategy - long calls, covered calls, cash-secured puts, protective puts, and collars - offers tailored approaches for speculation, income, or protection, with insights on when and how to apply them based on market conditions and investor outlook.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.
5 options strategies you can use for the upcoming Nvidia earnings
Introduction:
As Nvidia’s earnings announcement approaches, smart investors know that volatility can present both opportunities and risks. For those interested in more than a passive approach, options offer ways to capitalize on expected movements or protect existing positions. Here, we’ll explore five strategies tailored for different investment goals—whether speculative, income-driven, or protective. Each strategy has its unique merits and considerations, along with guidance on when it might be the right choice.
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.
1. Long call
Purpose: Long-term play on upward price movement
Setup explanation: A long call involves buying a call option at a chosen strike price, giving you the right to buy Nvidia shares if they exceed this price by the expiration date. For instance, with the 120 call expiring in September 2026, the net debit (or cost) is $5,750. This setup allows for leveraged exposure to potential gains.
When to use:
- Best suited for: Investors with a strong bullish outlook on Nvidia who anticipate significant positive movement after earnings. This is ideal for those looking to maximize upside without committing a large amount of capital to outright share purchases.
- Advantages:
- High leverage with limited downside risk (only the premium paid is at risk).
- Infinite upside potential if Nvidia’s stock rises significantly.
- Far away expiration (Sep 2026) gives ample time to reach profitability
Risks:
- The premium paid is at risk if Nvidia doesn’t move above the breakeven price of $177.50 (a 21% increase) by expiration (Sep 2026).
Side note: If your outlook on Nvidia is bearish, you might consider buying a put instead. A long put works as the opposite of a long call, benefiting from a decline in the stock's price.
2. Covered call
Purpose: Income generation with limited upside capture
Setup explanation: In a covered call, you hold Nvidia shares and sell a call option with a higher strike price. In this example, selling a call with a strike of $165 expiring in December 2024 generates a net credit of $430, capping the maximum profit at $2,404.
When to use:
- Best suited for: Investors who own Nvidia shares and expect the stock to stay relatively stable or rise moderately. This is ideal if you’re looking to generate extra income without committing additional funds to new positions.
- Advantages:
- Premium income provides a cushion against small declines in Nvidia’s stock price.
- Enhances returns in a flat or slightly bullish market.
Risks:
- Limits upside potential if Nvidia rallies strongly, as gains are capped at the strike price.
- Exposes you to potential losses on the stock position if Nvidia declines significantly (ie. no additional risk from the option).
Key numbers:
- Max profit: $2,404
- Max loss: $14,096 (if the stock were to go to zero)
- Breakeven: $140.96 (approx 3% decline from current price)
3. Cash-secured put
Purpose: Income generation with the potential to acquire shares at a discount
Setup explanation: In this strategy, you sell a put option while holding cash equivalent to the strike price, preparing to buy Nvidia shares if the option is exercised. Selling a put with a strike of $145, expiring in December 2024, generates a net credit of $900.
When to use:
- Best suited for: Investors willing to buy Nvidia shares if the stock dips to a more attractive level. This approach lets you earn premium income while being prepared to acquire Nvidia at a discount.
- Advantages:
- Premium income adds to overall yield.
- Enables purchase of shares at an effective discount (the strike price) if the stock dips below the strike price.
Risks:
- You may be obligated to buy shares at the strike price even if Nvidia declines significantly, leading to potential paper losses.
- Limited upside, as returns are capped to the premium received.
Key numbers:
- Max profit: $900 (premium income)
- Max loss: $13,600 (if Nvidia goes to zero)
- Breakeven: $136 (a 7% decline from current price)
4. Protective put
Purpose: Downside protection for long Nvidia holdings
Setup explanation: In a protective put, you buy a put option on Nvidia shares you already own, providing a safety net in case of a sharp decline. Purchasing a 140 put with an expiration in December 2024 incurs a net debit of $680.
When to use:
- Best suited for: Investors who already hold Nvidia shares and are bullish long-term but want to limit downside risk in case of disappointing earnings. This provides short-term protection while maintaining upside potential.
- Advantages:
- Protects against significant declines, capping losses at the strike price of the put.
- Peace of mind in holding through a potentially volatile earnings period.
Risks:
- The cost of the premium reduces overall returns if Nvidia doesn’t decline as anticipated.
Key numbers:
- Max loss: $1,206
- Breakeven: $152.06 (a 4% increase from current price)
5. Collar
Purpose: Balanced risk and reward with downside protection and income generation
Setup explanation: A collar involves holding Nvidia shares, selling a call option, and buying a put option. Here, selling the 160 call and buying the 140 put for December 2024 creates a net debit of $117. This strategy offers low-cost or even cost-neutral protection.
When to use:
- Best suited for: Investors who own Nvidia shares and want to protect against potential downside while being willing to cap their upside. This is often used by conservative investors who want to maintain equity exposure without extreme risk.
- Advantages:
- Low-cost structure as the call premium can cover the put cost.
- Protects against major losses while allowing for moderate gains.
Risks:
- Limits upside potential if Nvidia’s stock price rises significantly.
Key numbers:
- Max profit: $1,256
- Max loss: $744
- Breakeven: $147.44 (a 0.8% increase from current price)
Considerations for pre- and post-earnings execution
- Pre-earnings: Volatility tends to rise before earnings, increasing premiums. This benefits option sellers (like in the covered call or cash-secured put) but raises costs for option buyers (like in the long call or protective put).
- Post-earnings: Volatility usually drops sharply post-earnings—known as a “volatility crush.” This makes options like protective puts and long calls cheaper but reduces income potential for covered calls and cash-secured puts.
Conclusion
The strategies above offer different ways to manage risk and potential reward around Nvidia’s earnings. Long calls and puts can help capture directional moves, while covered calls and cash-secured puts allow for income generation. Protective puts and collars offer a balanced approach for those seeking downside protection. Each strategy has its unique benefits and limitations, so it’s important to align your choice with your financial goals, outlook on Nvidia, and risk tolerance.| Related articles |
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| Check out these guides and case studies: |
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| In-depth guide to using long-term options for strategic portfolio management Our specialized resource designed to learn you strategically manage profits and reduce reliance on single (or few) positions within your portfolio using long-term options. This guide is crafted to assist you in understanding and applying long-term options to diversify investments and secure gains while maintaining market exposure. |
| Case study: using covered calls to enhance portfolio performance This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains. |
| Case study: using protective puts to manage risk This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. |
| Case study: using cash-secured puts to acquire stocks at a discount and generate income This review investigates the cash-secured put strategy, where an investor sells put options while holding enough cash to buy the stock if exercised. This method balances income generation with the potential to acquire stocks at a lower cost, appealing to cautious investors. |
| Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. |
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.