Nvidia (NVDA) has been a key player in the AI-driven market rally, thanks to its GPUs essential for AI computation. As the market evolves, investors are looking for more clarity on when the company’s heavy investments will turn into substantial revenue. With NVDA’s earnings report on the horizon, there is significant anticipation about the demand for AI-related hardware and its impact on the company’s stock price. The stock has been consolidating within a narrow range, indicating a potential breakout or breakdown post-earnings.
Despite its leadership position in AI, Nvidia’s valuation has been stretched, leading to high expectations for continued growth. The market has already priced in perfection, leaving little room for error. To protect against potential downside risks going into earnings, a “put vertical spread” strategy can be utilized. This strategy involves buying a $125 put and selling a $110 put with the September 20 expiration date. By implementing this strategy, investors can limit their risk while providing significant downside protection.
The put vertical spread trade offers a net debit of $4.99, with a maximum reward of $1,001 and a maximum risk of $499. This trade allows for a 14% drop in NVDA’s stock price while only risking 4% of the position. In the event of strong earnings, the upside potential may be limited by the cost of the put spread. However, if the stock experiences a significant decline due to disappointing results, this strategy can help mitigate losses by potentially returning double the amount risked.
It’s important to note that all opinions expressed are solely those of the CNBC Pro contributors and do not necessarily reflect the views of CNBC, NBC UNIVERSAL, or their affiliates. The information provided is for informational purposes only and should not be considered financial, investment, tax, or legal advice. Before making any financial decisions, individuals should seek advice from their own financial or investment advisor to ensure that the strategies align with their unique circumstances.
While Nvidia continues to be a strong player in the AI market, investors should be mindful of the risks associated with the company’s valuation and market expectations. Implementing protective strategies, such as the put vertical spread, can help mitigate short-term risks while maintaining a long-term investment perspective. By carefully evaluating the potential outcomes and considering the broader market context, investors can make informed decisions to navigate the uncertainties of the market.