Splitting Shares, Winning Moves: Top Options Strategies for NVIDIA Post-Split

Welcome to the first week post-NVIDIA's exciting stock split!

If you're feeling uncertain about NVIDIA's next moves and wondering how to trade now, you're not alone.

Today, I’m here to share some savvy options strategies tailored for this new chapter.

The stock split comes with fantastic perks—it’s now easier and more affordable to buy shares and dive into options trading.

For NVIDIA fans, this means lower option prices, making it the perfect time for beginners to get started with options trading.

Below, I’ll introduce two options selling strategies ideal for scenarios where NVIDIA's stock isn't expected to skyrocket but where the risks remain manageable.

With the rapid growth of the AI industry, some investors believe that NVIDIA's stock price might correct without new growth catalysts.

If this indeed happens, a pullback might present a great entry opportunity.

For options traders, selling put options (Short Put) is a proactive strategy that lets you wait for the right moment while potentially profiting from the market's movements.

Suppose NVIDIA's current stock price is $120, and you anticipate a slight pullback in the coming months. You hope to buy in at a lower price during a potential pullback.

Consequently, you set up a strategy to sell put options (Short Put).

By doing this, you earn the option premium when the stock price rises; when the stock price falls, you can purchase NVIDIA shares at your desired price level.

Let's say you have a target buy price of $110. You decide to sell a put option with a $100 strike price, expiring in three months.

By doing this, you receive an option premium of $6.20 per share, totaling $620 in net premium income.

Collect an option premium of $620 when you sell the option. Once you successfully sell the Put, the premium is immediately credited to your account. You can check this by clicking on 'Accounts'- 'More'-'Funds Records'.

If the option is exercised, you not only collect the $620 premium but also get to buy NVIDIA shares at your desired price of $110.

In theory, the risk for an option seller is unlimited, while the profit is limited. If you are not prepared to take delivery of the shares, be cautious when selling Puts.

Always ensure you have enough margin in your account to cover your positions. This helps avoid the risk of a forced liquidation.

Scenario 1: If, by the expiration date, NVIDIA's stock price is more than $110, the buyer will not exercise the option.

Scenario 2: If, by the expiration date, NVIDIA's stock price is lower than $110, the buyer exercises the option.

It's worth mentioning that before the split, NVIDIA's stock price was as high as $1100. If you were to use this strategy then, you might have needed to prepare up to $120,000 in funds to take delivery, which could be a significant challenge for many individual investors.

Now, after the split, NVIDIA's share price has adjusted to $110 per share, so the cost to take delivery when selling a Put option is $11,000, which is considerably lower than before.

I previously mentioned that after a stock split, not only does it lower the threshold for trading options, but it also increases flexibility when executing options strategies.

For example, if you want to use a covered call strategy to earn additional income, a stock split increases the number of shares you hold.

This allows you to flexibly allocate your holdings: you can use some shares to execute covered calls and others for different strategies, achieving a diversified income approach.

Suppose you hold NVIDIA shares and are optimistic about NVIDIA's long-term prospects. However, you believe that without new growth drivers, the stock price may struggle to rise significantly in the short term.

At the same time, as a rational investor, you are aware of the time cost of holding stocks and hope to earn additional income through certain strategies.

For this situation, you set up a covered call strategy, which involves selling a call option (Call) while holding NVIDIA shares, thus using the stocks as collateral for selling the Call. This strategy hedges risk while earning extra income.

Assuming you think NVIDIA won't rise above $150 in the next three months, you sell a call option that expires in three months with a strike price of $150.

You receive an option premium of $3.9 per share, totaling a net premium of $390.

Scenario 1: If you already hold NVIDIA shares, you can directly sell a Call to construct a Covered Call strategy.

Scenario 2: If you do not hold NVIDIA shares, you can construct a Covered Call by clicking on Options > Chain > Covered Stock.

The system will automatically help you buy 100 shares of NVIDIA stock and sell a Call.

Let's break down this two-part strategy.

On the one hand, buy the shares. This trade suggests investors are bullish on the stock.

On the other hand, sell the call options. This trade alone suggests investors are not that confident the stock will go up.

Scenario 1: If, by the expiration date, NVIDIA's stock price is lower than $150, the option becomes out-of-the-money.

Scenario 2: If, by the expiration date, NVIDIA's stock price is above $150, the option becomes in-the-money.

In a covered call, the primary position is the long stock position and the short call is the secondary position. Still, the overall gain and loss is largely determined by the stock's price changes.

Here are some features of the strategy:

The strategy's maximum gain is determined by the call's strike price.

If the stock price reaches the strike price, covered call traders will be obligated to sell the stock, if assigned.

Therefore, they can only benefit from the potential upside between the stock purchase price and the strike price.

Experienced investors usually set the strike price of the call as their target sell price of the underlying stock.

If the stock price reaches the target sell price, investors can sell the stock as they expected and also profit from selling the call.

If the stock price fails to reach the target price, investors can earn the premium and do not need to fulfill their obligation.

Alright, that wraps up today's sharing.

The two strategies discussed are best suited for scenarios where you expect NVIDIA's stock price to remain relatively stable.

A word of caution: options trading involves risks, particularly for sellers. If you're not prepared to buy the underlying stock at a lower price, be cautious about selling Puts. Similarly, if you don't hold the underlying shares, be cautious about selling Calls.

Options are versatile tools, and your strategy should align with your market outlook. If you anticipate a substantial rise in NVIDIA's stock price, consider buying call options or using a bull spread strategy.

Stay tuned for next week, as we’ll dive into strategies designed for significant market uptrends.