Nvidia Makes the Pass into #3

Last year saw a huge surge in artificial intelligence (AI) development, and the momentum continues. This week, Nvidia ($NVDA) climbed to become the third most valuable publicly traded company in the U.S. based on market capitalization, surpassing Amazon.

On Wednesday, Nvidia’s stock rose by over 2% to reach $739 per share, pushing its market cap to $1.83 trillion. At that time, Amazon’s market cap was around $1.78 trillion, and Alphabet ($GOOGL), Google’s parent company, stood at $1.82 trillion. Nvidia now only trails Apple ($AAPL) and Microsoft ($MSFT).

Not too long ago, many in the market wouldn’t have even recognized Nvidia. However, the company, known for its high-quality chips favored by serious video gamers, has gained prominence due to the growing interest in AI.

Nvidia specializes in designing hardware specifically tailored for AI applications. Although its AI chips are pricey, costing over $20,000 each, companies in AI and cloud computing, like Amazon and Google, require thousands of Nvidia’s chips for their servers.

Over the past year, Nvidia’s shares have skyrocketed by over 220%. It’s among the top-performing tech stocks dubbed the “Magnificent Seven” that investors have heavily invested in since last year.

When Nvidia announces its fourth-quarter earnings on February 21, Wall Street anticipates a staggering annual sales growth of 118% to $59.04 billion.

Nvidia wasn’t the only chipmaker gaining traction this week. Wall Street’s excitement about NVDA largely drove up shares of Taiwan Semiconductor Manufacturing Co. ($TSM), which manufactures chips for Nvidia and Apple. After Morgan Stanley (NYSE: MS) analysts raised their price target for Nvidia’s stock from $603 to $750, TSMC’s shares reached a record high.

How to Trade It:

With options trading, employing sophisticated strategies can often yield lucrative outcomes. One such strategy that seasoned traders frequently leverage is the calendar spread. Also known as time spreads or horizontal spreads, calendar spreads involve the simultaneous purchase and sale of options with the same strike price but different expiration dates. This versatile technique offers traders the potential to profit from time decay while minimizing directional risk. Let’s delve into the mechanics of calendar spreads and explore how to execute them effectively.

Understanding Calendar Spreads:

At its core, a calendar spread involves selling a short-term option and buying a longer-term option with the same strike price. Typically, traders opt for options with the same underlying asset. The rationale behind this strategy lies in capitalizing on the accelerated time decay of the shorter-term option relative to the longer-term one.

Step-by-Step Guide to Trading Calendar Spreads:

Selecting the Underlying Asset: Begin by identifying an underlying asset with favorable volatility and liquidity characteristics. Stocks, indices, and ETFs are common choices for calendar spreads.

Choosing Strike Price and Expiration Dates: Determine the strike price at which you wish to execute the spread. It’s crucial to select expiration dates that align with your market outlook. The short option should expire sooner than the long one.

Analyzing Risk-Reward Profile: Evaluate the potential risks and rewards associated with the spread. Calendar spreads are ideal in scenarios where you anticipate minimal price movement in the underlying asset, allowing you to profit from time decay.

Executing the Trade: Place an order to simultaneously sell the near-term option and buy the longer-term option. Ensure that the spread is executed as a package to optimize pricing.

Managing the Position: Monitor the performance of the spread regularly. Adjustments may be necessary as expiration dates approach or if market conditions change significantly. Consider closing the spread or rolling it over to capture additional profits.

Key Considerations:

Volatility Impact: Calendar spreads are sensitive to changes in volatility. An increase in volatility can boost the value of both options, while a decrease may erode profits.

Time Decay Dynamics: Time decay is the primary driver of profit in calendar spreads. As expiration approaches, the short-term option loses value at a faster rate than the longer-term option, resulting in potential profits.

Risk Management: As with any options strategy, it’s essential to manage risk prudently. Set stop-loss orders or define clear exit criteria to mitigate potential losses.

Here is a calendar spread we recently executed at CFU on MSTR:

STO MSTR 030124 560 PUT
BTO MSTR 022324 560 PUT

CFU RESULTS FROM LAST WEEK:

These are the profits we locked up from the week ending February 16th:

Member Results

Member’s booking profit and learning to trust our system:

CLOSED AND REALIZED PROFITS 💰

Our community is fiercely focused on booking monthly profits.

We are currently not accepting new enrollments but be sure to keep an eye on joincfu.com for alerts when we open the doors for more members to join us.

Our February enrollment round OVER SOLD in 15 hours!

Stephen

President, CFU