Evaluating a 1-Week Cash-Secured Put Trade with NVDA

Cash-secured put and covered call writing trades can be winning or losing trades. When executed and managed properly, we will have many more winners than losers. Some trades will offer the opportunity to initiate exit strategy trade adjustments. In this article, a cash-secured put trade with NVDIA (Nasdaq: NVDA) will be analyzed. No position adjustments were executed.

NVDA data from our BCI Premium Member Stock Screen & Watch List on 11/11/2024

• NVDA: $145.37
• Ranked #3 on IBD 50
• On our stock list for 3 weeks
• Dividend yield: 0.00% ($0.01 per share)
• Ex-date: 9/12/2024
• Modest implied volatility (IV): 33.9%
• Industry segment rank: C (Chips)
• Next ER: 11/20/2024
• Bullish On Balance Volume (OBV)
• Analyst rating (MAR) an excellent 1.29
• Weekly options available
• $143.00 11/11/2024 OTM put strike has a bid price of $1.36

Initial calculations after trade entry on 11/11/2024

The initial 5-day option return is significant (0.96%, 70.09% annualized- brown cells). If share value drops below the $143.00 strike price, and no exit strategy intervention is taken, shares are purchased at the breakeven strike price ($141.64 yellow cell), a 2.57% discount (purple cell) from share price when the trade was executed.

Final trade results after contract expiration on 11/15/2024

On Friday November 15, 2024, the entire market declined significantly due to a disappointing retail sales report and mixed inflation data. NVDA closed at $141.98. During that last trading day of this weekly contract, I decided to “allow” exercise and assignment of the shares. The rationale for this decision was based on the upcoming earnings report on 11/20/2024. I decided to own NVDA through the ER, a maneuver I execute only rarely with certain specific stocks. NVDA has a strong history of ER “beats”. NVDA was now owned at a breakeven price of $141.64, $0.34 below current market value.

The 11/20/2024 earnings report results

• 11/20/2024: NVDA closes at $145.56 prior to the post-market hours report
• 11/20/2024: NVDA beats consensus, but market reaction was all over the map (see red and blue arrows)
• 11/22/2024: Decided to pursue a defensive course with the price volatility of concern, I sold NVDA at $141.85 and wrote a 12/20/2024 $135.00 cash-secured put for $3.50, generating a 29-day return of 2.7% and a breakeven price point of $131.50

Discussion

We should not have options in place that expire after an upcoming earnings report.  Post-earnings volatility can last 1-2 days. If volatility is a concern, using deep out-of-the-money cash-secured puts is a reasonable course to consider.

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Sample trade video

 

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