Nvidia (NVDA) has caught my attention today with a trade that appears low-risk and offers some revenue potential. The strategy being used is called a broken wing butterfly. The use of puts is essential here, as the short strikes are positioned below the current stock price, which helps minimize allocation risk.
In standard butterfly option trading, the wings are usually equidistant from the short strikes, but broken wing butterflies have larger gaps on one side. This modification allows for reduced risk on one side, while, conversely, it increases risk on the other.
Nvidia Stock Broken Wing Butterfly
Here’s a breakdown of how the Broken Wing Butterfly Trade is structured for Nvidia stocks:
- Buy 145 Puts for November 21 at 2.00
- Buy 155 Puts for November 21 at 3.55
- Buy 160 Puts for November 21 at 14.70
It’s noteworthy that the puts at the upper strike are situated 5 points away from the central put, while the lower strike puts are 10 points away.
This broken wing butterfly trade can be initiated for a small credit of approximately $40, which means there’s effectively no risk to the upside.
If Nvidia increases in value, the worst-case scenario remains that a $40 return will still be available for the trader. But what if Nvidia declines? Well, it really depends on how much it falls. Ideally, Nvidia should hover between 155 and 160 at expiration. If it dips below 160, there’s potential for profits reaching up to $540 by the end of the trade.
However, should Nvidia fall below 155 at expiration, profits will start to dwindle, breaking even at around 149.60. A further drop below that—say, if Nvidia hits below 145—could mean losses up to $460. Despite this, it’s a risk-defined trade; traders won’t lose more than $460, no matter how low the stock goes.
Evaluation of Chip Giant in IBD
The trade kicks off with a delta of 3, suggesting a slight bullish inclination. But, if the stock price remains above 160, that bias shifts toward a negative delta.
In terms of risk management, it’s wise to set a stop-loss if NVDA drops 10-15% under the 155 level.
Investor groups consistently rank Nvidia highly, giving it a Composite Rating of 99, an Earnings Per Share Rating of 99, and a Relative Strength Rating of 87. According to IBD Stock Check Up, Nvidia holds the top position in its category.
Nvidia plans to release its revenue figures by the end of November, which suggests minimal revenue risk for this trade.
This text serves educational purposes and isn’t a trade recommendation. Always conduct thorough research and seek advice from a financial advisor before making investment choices.
Gavin McMaster holds a Master of Applied Finance and Investment, focusing on conservative income trading using options. He emphasizes patience in waiting for optimal setups as essential for successful trading. Follow him on @optiontradiniq’s X/Twitter.
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