Nvidia stock has been on fire lately! So far this year, the chipmaker’s stock has skyrocketed over 150%, and over the past five years, it’s blown up by an insane 3,300%.
Nvidia’s epic rise has been a major boost for the S&P 500, with NVDA shares making up about one-third of the index’s gains in 2024. The S&P 500 itself has climbed roughly 13% this year.
So, it’s no shocker that Nvidia just leapfrogged Apple (NSDQ: AAPL) in market cap. On Wednesday, Nvidia hit the $3 trillion mark for the first time ever, making it the second-most valuable company after Microsoft.
Nvidia’s secret sauce? They’re designing must-have hardware for AI applications. Their products are in crazy high demand, leaving competitors like Intel and AMD in the dust. Nvidia now owns about 80% of the AI chip market for data centers.
Want more details? Well, Nvidia just reported a mind-blowing 427% year-over-year revenue jump in their data center business last quarter. This segment alone made up nearly 90% of their sales.
This week’s hype was all about CEO Jensen Huang’s keynote at the Computex conference in Taiwan. He showcased the next-gen platform, Rubin, and a souped-up version of the current Blackwell systems.
But Nvidia isn’t the only Big Tech stock on a roll. Alphabet (Google), Amazon, Meta, and Microsoft have also been major players, contributing 26% to the S&P 500’s gains.
On the flip side, Tesla has been a drag, with shares plummeting nearly 30% since the start of 2024.
How to trade it:
You want a fully hedged bullish trading strategy which can take advantage of the trend, but cap your downside risk!
Call Debit Spread:
A call debit spread is a slick options strategy where you buy one call option and sell another at a higher strike price, both with the same expiration date. It’s a good way to play the market if you think a stock’s price is going up but want to limit your risk and save some cash compared to just buying calls outright.
Why Should You Care?
- Lower Cost, Lower Risk: By selling a call at a higher strike price, you offset some of the cost of buying the first call. This means you’re spending less money upfront and capping your potential loss to just the net premium paid.
- Defined Profit Potential: Your profit is capped, but so is your risk. You know exactly how much you can make if the trade goes your way, which makes planning and managing your trades a breeze.
- Ideal for Modest Moves: If you believe a stock is going to rise but not shoot to the moon, call debit spreads are perfect. You benefit from the rise without needing a massive jump in price to turn a profit.
How to Set Up a Call Debit Spread
- Pick Your Stock: Find a stock you’re bullish on. Do some homework—check out the charts, read the news, and get a feel for its potential moves.
- Choose Your Strikes: Buy a call option at a lower strike price (in-the-money or at-the-money) and sell another call at a higher strike price (out-of-the-money). Both should have the same expiration date.
- Calculate Your Costs: The net premium (the difference between what you pay for the lower strike call and what you receive for the higher strike call) is your maximum risk. This is also the initial cost of the spread.
- Plan Your Exit: Know your target profit and be ready to close the trade when it hits. Also, set a mental stop-loss to bail if things go south.
Example Time!
Imagine you’re looking at NVDA, trading at $1191 as of writing this post. You buy a call option with a $1190 strike price a month out and simultaneously sell the 1200 call option. The total net debit for this position would be $475
If NVDA continues the trend and gets above $1200 or higher by expiration, you pocket $525 in profit. It is fantastic way to genereate solid returns all while maintaining a fully hedged position.
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