NVDA Options Playbook: From Straddles to Butterflies

(how are you going to play it?)                                                                                                                                                                                                                                                                                                                                                                                                                 August 26, 2024 | [Read Online]( [fb]( [fb]( [fb]( [fb](mailto:?subject=Post%20from%20Don%27s%20Trading%20Desk&body=NVDA%20Options%20Playbook%3A%20From%20Straddles%20to%20Butterflies%3A%20%28how%20are%20you%20going%20to%20play%20it%3F%29%0A%0Ahttps%3A%2F%2Fdon-kaufman.beehiiv.com%2Fp%2Fnvda-options-playbook-straddles-butterflies) Don Kaufman here. We're about to dissect a high-stakes options setup using NVIDIA (NVDA) as our case study. And we're going to break this down so even your grandma could trade it. (Well, maybe not, but you get the idea.) NVDIA will make or break the Nasdaq this week… The Setup As of now, NVIDIA is trading around $127. They're set to report earnings on Wednesday after the bell. Here's what we're looking at: - The at-the-money weekly options expiring Friday have an implied volatility (IV) of 133%. - The at-the-money straddle is priced at $14. Let's decode what this means and why it matters. Understanding Implied Volatility First off, that 133% IV is sky-high. In layman's terms, the options market is pricing in a massive move. But why does IV matter? Here's the deal: - Higher IV = More expensive options - IV typically spikes before earnings and crashes after This volatility crush is crucial to understand. After earnings, when uncertainty dissipates, IV often plummets, taking option prices down with it. Deciphering the Straddle The $14 at-the-money straddle is giving us valuable information. Here's how to interpret it: Add the price of the at-the-money call and put (in this case, they sum to $14) This sum represents the market's expectation of the stock's move in either direction So, the options market is pricing in about an 11% move ($14 / $127) in NVIDIA after earnings. That's substantial, folks. Trading Strategies Now, how do we play this? Here are some strategies to consider: Bullish Strategies Outright Call Option Example: Buy the $130 Call (slightly OTM) for $7 Break-even point: $137 Here's the math, folks: You need NVIDIA to climb to $137 ($130 strike + $7 premium) just to break even at expiration. That's about a 7.9% move up from our current $127 price. Anything less, and you're underwater. Bull Call Spread Example: Buy the $125 Call (slightly ITM) for $7.90 Sell the $135 Call (OTM) for $3.90 Net debit: $4 Break-even point: $129 You need NVIDIA to rise to $129 ($125 strike + $4 net debit) to break even. That's about a 2.4% move up. Less scary than the naked call, but still needs some upward momentum. Iron Condor Example: Sell the $115 Put (OTM) for $2.40 Buy the $110 Put (further OTM) for $1.30 Sell the $140 Call (OTM) for $2.55 Buy the $145 Call (further OTM) for $1.60 Net credit: $2.05 You profit as long as NVIDIA stays between $112.95 and $142.05 at expiration. That's your sweet spot. Below $112.95 or above $142.05, and you start losing money. Let's break this down further: Maximum Profit: $2.05 per spread if NVIDIA closes between $115 and $140 at expiration. Maximum Loss: $2.95 per spread ($5 width of either spread minus $2.05 credit received) if NVIDIA closes below $110 or above $145 at expiration. Profit Zone: Any price between $112.95 and $142.05 at expiration. Long Call Butterfly Example: Buy 1 $120 Call (ITM) for $10.50 Sell 2 $130 Calls (ATM) for $5.60 each Buy 1 $140 Call (OTM) for $2.77 Net debit: $2.07 Now, let's calculate our key metrics: Break-even Points: Lower break-even: $120 + $2.07 = $122.07 Upper break-even: $140 - $2.07 = $137.93 Maximum Profit: Occurs at $130 (middle strike) Max Profit = $10 (wing width) - $2.07 (net debit) = $7.93 per spread Maximum Loss: Limited to the net debit paid: $2.07 per spread Here's what this means for your NVIDIA earnings play: Profit Zone: You're profitable if NVIDIA closes between $122.07 and $137.93 at expiration. That's a range of about 12.4% centered around $130. Maximum Profit Potential: If NVIDIA lands exactly at $130 at expiration, you'll make $7.93 per spread. That's a 383% return on your risk - not too shabby! Limited Risk: Your downside is capped at $2.07 per spread, no matter how far NVIDIA might fall or soar. Sweet Spot: Your profit increases as the stock price approaches $130, peaking right at that level. Now, let's talk strategy: - This butterfly is ideal if you're expecting NVIDIA to make a move, but not an explosive one. You're essentially betting on a post-earnings price around $130. - The narrow profit zone means you need to be pretty accurate in your prediction. But the payoff if you're right can be substantial. - Time decay works in your favor as expiration approaches, assuming NVIDIA is near your target price. - If NVIDIA moves outside your profit zone early, you might consider closing the position to salvage some premium, rather than hoping for a reversal. This butterfly spread offers a high potential return with limited risk, but it requires precision. You're trading probability of profit for a higher potential payoff. It's a strategy that says, "I don't just think NVIDIA will go up or down - I think I know roughly where it will land." The Bottom Line Trading earnings with options is not for the faint of heart. It requires understanding complex dynamics like implied volatility, option pricing, and probability. But for those who put in the work, it can offer unique opportunities. Remember, the goal isn't just to predict the stock's direction, but to find the best risk/reward given the current option prices and your market outlook. This is the kind of setup that separates the pros from the amateurs. So do your homework, manage your risk, and may the trading gods smile upon you. To your success, Don Kaufman P.S. I’ll be going live this Wednesday to talk about a very special strategy I’m calling 24-Hour Profit Windows. [Click here to register.]( [fb]( [tw]( [ig]( [yt]( Update your email preferences or unsubscribe [here]( © 2024 Don Kaufman - TheoTrade PO Box 24790 Christiansted, Virgin Islands 00824, Virgin Islands, U.S. [Terms of Service](