Smart Investor: 5 options strategies you can use for the upcoming Nvidia earnings

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