Nvidia (NVDA) has dropped sharply after news about its founder stepping down as CEO, and the stock is trading near $160 with earnings due next week. In episode 31 of Fundamental Fridays, Brian Overby, a long-term NVDA holder himself, explains how investors who are “bullish but nervous” can use options to protect a stock position instead of selling it in a panic. He starts with implied volatility. NVDA normally trades at an implied volatility of about 25% to 30%; it is now near 62%. Brian compares this to buying homeowners insurance when a storm is already on the radar: protection costs the most when everyone wants it. That is why he prefers short-term protection of about 28 days, renewed if needed, over expensive six-month puts. The main trade is a long put spread, also called a put debit spread, for every 100 shares owned. Brian buys the December 11 155 put and sells the 130 put for a net debit of about $6.80. The 155 put alone would cost about $8.70, so selling the 130 put lowers the cost by roughly $2. Using his car-insurance comparison, the $5 gap between the $160 stock price and the 155 strike is the deductible, and the spread covers 25 points of decline from 155 to 130. Paying about $1.25 more for the 160 strike removes the deductible, and a 150 strike lowers the cost further. Selling the 130 put also helps offset the risk of a “volatility crush” if the stock recovers and implied volatility falls. The second idea is more advanced. Instead of a plain covered call, such as selling the 185 call (about a 20 delta) for roughly $3.10 to $3.25, Brian uses what the Options Playbook calls a front spread: buy one 175 call and sell two 185 calls for a net credit of about $0.93. One short call is covered by the 100 shares and the other forms a call spread, giving the holder up to 10 extra points of gain between 175 and 185 if NVDA rebounds. Brian notes that this only works when implied volatility is high, that the shares may be called away (with possible tax consequences), and that the ratio spread must never be traded without owning the stock. Key takeaways: – High implied volatility makes protection expensive, so shorter-term coverage can be more efficient. – A long put spread lowers the cost of a hedge in exchange for a deductible and a floor on protection. – A 1×2 front spread on owned stock can add upside, but the extra short call must be covered by shares. – Decide how much protection lets you hold the position without panic selling. Options are risky. Please consider this for educational purposes only and not suggestion. |
