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Selling Big Name Options for Big Money - NVDA
Plus, a look at multiple trade ideas for NVDA and trading semiconductors.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
It truly is a semiconductor world and we are just living in it. NVDA has this sector absolutely on fire, trending up and to the right.
And where there is a trend, there is a trade.
Which brings us quickly to a very strong rule of trading that you should repeat to yourself often. Do not fight the trend. Don’t do it!
Said another way that you no doubt have heard, “the trend is your friend.”
Said yet another way, don’t try shorting NVDA or the semiconductor stocks right here. It is not wise and I’ll explain why.
It is easy to spot the trend. Look at a few charts, identify the direction, and then go with it.
Stop trying to pick the top or the bottom. It feels great when you get it right, which is why the temptation to keep trying is there. But ultimately it is a suckers game.
We are not suckers. We are sellers of options. Collectors of premium. Account building machines!
I’ve detailed covered call trades in the smaller names like SOFI, CPNG, and DKNG but this week we will look at opportunities with NVDA. The big dog and undeniable leader in the chip world.
I also have a few trade ideas for this shortened week of trading that I’ve dropped towards the end of this week’s newsletter for your enjoyment. Let me know what you think and if you have other ideas!
If you are getting value out of the newsletter, I would love to hear about it! I appreciate everyone’s comments and look forward to continually making improvements week after week.
And as always, a huge thank you to those pledging the price of a sandwich every month in a show of appreciation.
Ok, now for trading NVDA and the semiconductors and how to optimize this run if you own shares and even if you don’t! Let’s get to it.
Cashing In on NVDA Action with Options
There is no mistaking the incredible run that has shown zero indication of slowing down for NVDA. What an earnings report and subsequent move in the stock price!
The move put the candles way out in no man’s land, well above the trading levels I've been tracking to. So what do we do now?
If you own shares of NVDA the first thing you do is congratulate yourself and celebrate the win with a small pat on the back.
The second thing you do is decide what to do next. If you are a trader, you are always looking for the next opportunity and big moves like this often present them.
So, if you own 100 shares of NVDA and think this run is ready for a pause or even a reversal you can consider selling covered calls against your shares.
I like this strategy for adding additional stacks of cash to your portfolio but only if you are ok with the idea of your NVDA shares getting called away. This is always a possibility.
If you like collecting piles of cash and do not mind risking your shares of NVDA being called away at a higher price than they are today, I like the set up we are seeing.
NVDA Trade Idea #1
I like considering selling covered calls expiring June 9th at the $420 or $430 strike prices. These were yielding 1% and 1.25% respectively over just two short weeks which you can add to your account to bolster returns.
Or, you can wait for the next push to $420-$430 and sell covered calls that are only just slightly out of the money (OTM) to collect a much higher premium closer to 3-4% over the next 9 trading sessions.
NVDA Trade Idea #2
Keeping in the bullish camp, if you have not been able to participate in the latest run up for NVDA but also do not want to dive in with the $40,000 it would require to buy 100 shares, you can use options to risk less.
For NVDA, call options are currently expensive which is understandable due to the recent price action. When options are expensive but the trend suggests I take a long position, I like to use spreads to reduce the cost and overall dollars being traded.
Effectively I am reducing risk by selling an option that is further out of the money, collecting that cash but capping the upside potential gains.
In this instance, I like considering a June 9th call spread buying the $390 strike and selling the $420 strike price for a net cost of about $9.
The total spread between strike prices is $30 which allows for more than a triple of the original $9 trade before capping the gains at the $420 strike price.
So, if NVDA moves up to $420 the value of the call spread will be $30 but will not move any further because of the call option sold at the $420 strike price.
Compare this to just buying the $390 strike calls for $14.00. You have reduced how much you’re risking in the trade by over 35% to the $9 trade price by using a spread strategy instead of simply owning calls at the $390 strike.
Additionally, let’s assume that instead of buying the $390 strike you buy the $410 strike hoping the shares will blast higher.
If you do this to try to save some cash and the shares make it to $410 but stop there, you lose 100% of your trade at the expiration date if you still own the option.
However, if you’re using a spread you would making double your money. This is because you only paid $9 for the $390 strike option which is now worth $20 ($410-$390 = $20).
I hope this highlights the power of using spreads and why choosing the correct strike prices is so important.
An NVDA Trade I Do NOT Like Here
I understand the price has ripped higher and there is a huge gap below that could be filled by a reversal. I see it too. We all do.
And the urge is to time it perfectly, catch the reversal and make a huge profit on the short trade you get into way ahead of most.
This is a mistake.
Traders often outthink or outsmart themselves and it can be extremely costly when that thinking leads to fighting the trend.
You may not agree with the trend. You may not like it at all. That is fine, you can choose to not trade it.
The worst thing you can do is try to force the market to do what you think is right. The markets really do not care and will punish you for the fun of it.
I do not like shorting NVDA or any of the semiconductor stocks here. I’ll let you know if and when that changes. Or you can just check the charts for a clear trend reversal on strong volume.
More Trade Ideas and BIG NEWS!
Sticking with the semiconductor theme, there could be more upside in the very near term for the semiconductor ETF, SMH.
The shares are no doubt already extended and could take a breather for a bit before a continuation higher. That said, I like a push for the prior high of $159.41.
A trade to consider for this push would be SMH call options with the June 16th expiration date and $150 strike for about $3.40. Targeting the $159.41 level for taking profits which would allow for just under a triple if the shares made the run.
I also detailed out what I’m seeing with ON for a potential trade. These are from my private trading plans which I have organized on a discord server. I love being able to quickly and easily jump to my notes for each ticker I trade.
I have been dropping my trade plans and thoughts into this server over the past couple of weeks and am preparing to have it go live in the coming weeks.
Let me know if you would be interested in access to the Discord Server and I will send you a discount code as a thank you for being subscribers to A Trader’s Education.
Here’s a look at the tickers I’m currently covering in addition to the weekly trading prep, trading education videos, and trading recaps.
Twitter Spaces - Chart Reviews, Trading Strategies
I hope you find this information useful each and every week.
If you are looking to sharpen your chart analyzing skills further while hearing about what traders are looking at for possible trades, be sure to also tune into the podcast for A Trader’s Education.
Hosted on Twitter Spaces and found on iTunes and Spotify, we are looking to move the Trading Triangle to YouTube as well to provide a more robust analysis complete with video.
It is packed with value and always an all around great time!
We discuss strategies, including selling covered calls and cash secured puts, and review charts for a variety of tickers.
Link to this week’s Twitter Space: Sunday Trading Prep
Thank you again for reading and have a great week!