I Made 8.6% Returns In 35 Days By Buying Nvidia Share Option Contract (15 Oct 21)

Nvidia is a semiconductor company that designs and produces Graphics Processing Unit (GPU) chips that are essentials for PCs, gaming as well as chip systems for AI, autonomous vehicle and data centers.

I sold a Nvidia PUT option contract, with strike price of $235 and expiration date on 19 Nov 21, 35 days from now. As a result, I collected a premium of $20.25 per share for the 100-share contract.

Returns = Premium / Strike Price = $20.25 / $235 = 0.08617 = 8.617% returns

So what are scenarios that may happen?

Scenario 1: On 19 Nov 21, Nvidia share rises above $235. The PUT option will not be exercised and I will not be owning any shares of Nvidia. I get to keep the premium as part of selling this option contract.

Scenario 2: On 19 Nov 21, Nvidia share falls below $235. The PUT option will be exercised and I will buy 100 shares of Nvidia at $235 each. With the premium collected, my breakeven price for Nvidia shares is $214.75

Scenario 3: Prior to 19 Nov 21, I choose to exit the option contract by buying a put option of strike price of $235 and expiration date of 19 Nov 21. Depending on the market price when I choose buy the PUT option to exit the contract, I may be paying less or more than the premium that I have collected.

E.g. 1
On 1 Nov 21, Nvidia shoots up to $250, the premium required to buy a PUT option contract at $235 strike price will definitely be lower than $20.25. So, I can get to close the contract earlier if I want to while bagging the nett profits (sell price minus buy price) without owning the shares and freeing up my capital for other investment.

E.g. 2
On 18 Nov 21, Nvidia shares dropped to $210 and it is likely I would have to buy the shares the following day (expiration date, 19 Nov 21) for $235, but I changed my mind towards owning 100 shares of Nvidia, so I pay a premium to buy a PUT option (which is likely to be higher than the premium contract) to exit the contract. Though I will make a loss, I avoid the option contract being exercised and using my capital to buy 100 Nvidia shares.

[Conclusion]

Nvidia is one of my favourite companies alongside Alphabet (Google), Facebook, AMD and Apple. It’s dominance in the GPU space gives it a great moat (advantage) over its rivals. They have reported strong earnings last quarter and the company has great fundamentals, is making a lot of money and has a visionary CEO who will continue to bring the company higher. The share price is also steadily increasing over the past year as strong demand of their product continues in the gaming, AI, vehicles and even crypto mining space.

So, I don’t mind owning 100 shares of Nvidia at $214.75 (minus premium breakeven price) even if the option contract is exercised. If the share price rises above $235 after their Q3 earning report, then I am happy to collect the premium of 8.6% returns.

[Balancing Up My Options Trading Portfolio]

Overall % of LEAPS 79.55% —-> 72.42%
Overall % of PUTS 1.23% —-> 10.79%
Overall % of CALLS 19.22% —–> 16.79%

The purchase of Nvidia LEAP option is a change of strategy towards balancing up my option trading portfolio, to increase allocation in CALLS/ PUTS while reducing allocation in LEAPS as my portfolio is too heavy on LEAPS. LEAPS options are good in bull market but when the market goes sideways or downwards, I am stuck with the contract and there is no way to generate any income out of it. On the other hand, CALLS/ PUT options may bring lower premium returns but they offer flexibility during a sideway market or bear market. I will do up another post in future to compare the LEAP and WHEEL (CALLS/ PUTS) option strategies.

Related Articles:
How PUT Option Works
How Call Option Works
How Does The WHEEL Strategy Works?

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