Into Nvidia (NVDA) Q3 earnings on November 15th, Dan previewed the event and detailed a couple of trade ideas, one a very low cost bullish idea targeting the expected move higher and one more aggressive bearish idea that could capture an outsized move lower, either outright or as a hedge for long holders. Here was that trade idea:
Bearish Trade Idea: NVDA ($200.50) Buy Dec 200 / 160 put spread for $11
-Buy to open 1 Dec 200 put for $14
-Sell to open 1 Dec 160 put at $3
NVDA got slammed following the report and is still attempting to find some buyers. With the stock now 148 the put spread is worth about $37, almost its entire max gain (40). As long as the stock closes in December below 160 this will max out at $40, and any move higher than 160 puts some of the gains at risk. Therefore when to close is simply if that extra $3 matters.
As far as how to position following taking profits on this put spread, there are a couple interesting moves that could be done. If you think the move is a bit overdone, and would like to position for the stock to make a bit a move back higher, filling in some of the gap, you could sell to close the 200 puts at a profit, leave the short 160 puts on and buy the Dec 145 puts to open (currently about 7.50), converting the position into a a short put spread. That would only be risking a small portion of current profits (while locking in the majority of the gains) and allowing for a way to profit if the stock could find some footing. If the stock were able to get back to 160 it would mean an additional 8.50 or so in profits. If the stock continues lower you’d be risking about 6.50 of your current profits. (If the the stock closed below 145 on Dec expiration, losses would be about 6.50)
Of course, there’s no guarantee the stock bounces, and for those longs still nervous about lower lows, it probably makes sense to look a little further out and spend as little money as possible, perhaps the Jan 140/120 put spread, currently around $5. That’s not a ton of money to spend for protection, and it could save up to $15 in potential losses if the stock continues down to 120 or lower, while allowing for unlimited gains in the stock on any bounce from here.