NVDA Stock: Looking At A Reverse Butterfly Option Trade

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Nvidia (NVDA) stock has been in a very tight range between 520 and 540 for the better part of six weeks.


The Bollinger bands on NVDA stock are the tightest we have seen in over 12 months. In situations like this, there is a good chance the stock will experience a breakout at some point.

NVDA stock is highly rated with a Composite Rating of 98, so chances are it will break out to the upside. But what if we are confident of a breakout, but we are not sure if the stock will go up or down?

Luckily, there is an option strategy for just that scenario.

Normally, that would mean buying either a long straddle or long strangle. However NVDA options are quite expensive and that trade could cost over $9,000.

Another idea is to trade a reverse butterfly which would be constructed as follows:

1. Sell 1 in-the-money call.

2. Buy 2 at-the-money calls.

3. Sell 1 out-of-the-money call.

The trade will benefit from a big move in either direction from Nvidia stock.

Let’s take a look at how that might look on NVDA stock as Tuesday.

Sell 1 March 19; 505 call at 58.20.

Buy 2 March 19; 525 calls at 47.50.

Sell 1 March 19; 545 call at 38.50.

NVDA Stock Option Strategy Generates $170 In Premium

In total, the trade would generate around $170 in premium with a maximum risk of $1,830.

What the trade is looking for is a quick price move in either direction. The trade loses value each day through time decay while NVDA stock remains between the break-even points of 506.70 and 543.30.

These are calculated by taking the lower strike (505) and adding the premium (1.70), and taking the upper strike (545) and subtracting the premium.

For a trade like this I would set a stop loss of 20% which is around $360.

A reverse butterfly is a nonstandard option trade and therefore not recommended for beginners.

It’s important to remember that options are risky and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ


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