Nvidia (NVDA) has been a key player in the AI-driven market surge over the last 18 months, thanks to its dominant position in the GPU space, which is critical for AI computation. As the company continues to invest heavily to maintain its leadership, investors are eager to see when these investments will start to significantly boost revenue. However, with Nvidia’s earnings report due after the close on Wednesday, there’s growing concern about the possibility of a short-term pullback, despite long-term bullish sentiment.
Trade Outline
For investors who want to stay committed to Nvidia for the long term but are wary of potential short-term volatility, a protective options trade could be a prudent approach. Nvidia has been trading within a narrow range of $124 to $130, which could signal a breakout or breakdown following the earnings report. This range reflects the market’s uncertainty and the high stakes surrounding the upcoming earnings.
Given the stretched valuations due to Nvidia’s leadership in AI, any earnings miss or a less-than-expected outlook could trigger a significant drop in the stock price. To guard against this downside risk, a put vertical spread using options with a September 20 expiration is recommended:
- Buy the $125 put at $7.55
- Sell the $110 put at $2.56
- Net Trade Cost: $4.99 per share
- Maximum Potential Profit: $1,001
- Maximum Potential Loss: $499
This strategy provides substantial downside protection, covering a potential 14% drop in Nvidia’s stock price while capping the risk to just 4% of the position. Should Nvidia’s earnings exceed expectations, the trade’s upside is only reduced by the cost of the put spread. However, in the event of a significant downturn due to disappointing earnings, this strategy offers the potential to double the amount risked, effectively cushioning against sharp losses.
