Recently, the U.S. stock market has been volatile, with the Nasdaq index falling 13% from its high. The stock prices of seven major technology stocks, represented by Nvidia, have suffered a heavy blow, causing many investors to fall into the unfavorable situation of being trapped in stocks due to market fluctuations. Do we have any way to deal with the strategy if the market does not rise or fall in the future?

At this time, in addition to waiting for the market to pick up, options can also be used as an effective risk management tool to mitigate or offset the losses caused by the decline in stocks.

But we need to remember a premise: the company's fundamentals must be very solid, and there will be no risk of long-term revenue and profit declines.

The following are several common option strategies:

1. If it is judged that the stock price cannot rise sharply for the time being and is prepared to hold for a long time, then continue to cover the call

For example, assuming that an investor purchases Nvidia stock (100 shares) at $120, as of August 7, 2024, the current market price has fallen to $98.9. By selling a call option with an expiration date of August 23 and an exercise price of $120 (note that 1 option does not correspond to 1 share, but 100 shares), a premium of $67 is immediately obtained to reduce the loss of the position.

By the expiration date of the option on August 23, there are several situations (the following method simplifies the fees, and the actual situation needs to include the transaction fee):

1) If Nvidia's stock price rebounds but remains below $120, the option will not be exercised, and the investor's option fee income is $58. For example, assuming that on August 23, Nvidia's stock price rebounds to $110, the investor's loss on the underlying stock is $1,000, that is, the final loss is $1,000-67=953.

2) If the stock price rises above $120, the option is likely to be exercised, and the investor needs to sell the stock at the exercise price of $120, which means that the investor will lose the profit of the continued rise in the stock price, but also compensate for part of the loss through the option fee income. For example, if Nvidia's stock price rebounded to $130 on August 23, the investor would need to sell at $120, and the underlying stock profit would be 0, thus achieving capital preservation; while the premium profit would be $67, which means the final profit would be $67.

3) If the stock price continues to move sideways and the investor continues to make similar covered call transactions, the accumulated option fees will make up for certain investment losses; for example, if the investor makes a covered call transaction once a month and the option fee earned for each transaction is $67, then after 12 months, if Nvidia's stock price still does not break through the strike price and hovers around $100, the accumulated profit from the option fee is $804, and the investor's underlying stock loss is $2,000, but after deducting the profit from the option fee, the loss is reduced to $1,196.

The risks and drawbacks of the Covered Call strategy are that the effective implementation of the Covered Call strategy often requires investors to hold a considerable number of stocks, because in the U.S. stock market, a standard call option contract represents 100 shares of stock. This means that in order to sell a call option, investors usually need to hold at least 100 shares of the corresponding stock. For Nvidia, 100 shares of Nvidia is equivalent to holding a position of $9,800. If it is not enough, we have other strategies, that is, we need to use technical analysis to perform some short-term operations ourselves.

2. Use stock volatility for trend trading

For stocks with extremely high liquidity and volatility such as Nvidia, if a short-term trend is assumed, technical indicators can be used to try to reduce losses through active trend trading.

In short, the trend line trading method is to follow the general direction of the price of stocks or financial products to buy and sell.

The highs and lows on the price chart are connected into a line. The rising trend line is connected from low to low, indicating that buyers are dominant and suitable for buying when the price pulls back to the trend line;

The falling trend line connects the highs, showing that the sellers are strong, and you can consider selling when the price rebounds to the trend line.

If the price breaks through the trend line, it may indicate a trend reversal:

The rising trend line is broken, which is a sell signal;

The falling trend line is broken, which is a buy signal.

Since technical analysis relies more on psychology, in technical analysis, short-term trends generally only have the best trading effect when they touch the trend line for the first time, and the second time is weaker. Moreover, more people need to pay attention to the trend line, and the effect will be better. We can see that in the ups and downs of the market, if you find the most suitable trading node in a certain range, you will effectively complete the trend trading. For example, the figure below is a 10-minute line. The trend line formed by the M5 (the average of the closing prices of the last 5 K lines) set by the 10-minute line is a strong moving average.

After confirming the trend direction, follow the trend to trade. Enter the market when the price breaks through the key resistance or support level. Or look for overbought or oversold signals and reverse trade when the price reaches extreme levels.

Using high-volatility stocks for intraday trading is an active strategy that can help investors find opportunities when stocks are trapped. However, intraday trading is a high-risk strategy suitable for experienced investors who can withstand market fluctuations. Secondly, if there is no trending opportunity, short-term range fluctuations can be used for trading.

In addition, if it is assumed that the stock price fluctuates within a certain box, trend trading and other technical indicators can also be used to track it. We have many trading courses involving technical analysis in the moomoo classroom to assist everyone in trading.

$NVIDIA (NVDA.US)$

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