Alternative Approach to Nvidia’s Earnings Pays Off

navigate market volatility and generate income

Now that the Nvidia earnings frenzy has passed, let’s look at how we capitalized on the volatility surrounding the AI leader’s announcement with a trade that yielded a nearly 11% return. And the best part is we didn’t have to guess what the company would say or which way the stock might trade post-earnings. 

For some time now, Wall Street has waited with bated breath each quarter for AI darling Nvidia (NVDA) to release its results. In fact, some people have nicknamed it “Nvidia Day.” CNBC even runs an earnings countdown like it is New Year’s Eve. 

It’s not often that a stock gets this much clout. But investors have come to see Nvidia as an indicator of the overall health of the artificial intelligence (AI) market, of which it is the clear leader. 

As goes Nvidia on earnings day — and the move is often quite large– so goes the rest of the tech sector and, sometimes, the market at large. That makes the stock a favorite target of earnings traders and others looking to capitalize on volatility for fast profits. 

But as anyone who has traded earnings before knows, it’s not for the faint of heart. Some people look to buy shares of a company ahead of an announcement if they think the company will beat. Others look to bet on a company’s results by buying call or put options to profit from outsized post-earnings moves up or down.

However, even if you correctly predict whether a company will beat or miss estimates, there’s no telling how the market will react. So, as we headed into “Nvidia Day,” we took a different approach in Income Masters. 

Before we get to that, let’s quickly review how the company did this time around. 

Nvidia reported record-breaking results after the closing bell on Wednesday. Revenue soared 262% from a year ago to $26 billion. This was the company’s third consecutive quarter of 200%-plus year-over-year revenue growth. Meanwhile, adjusted earnings of $6.12 per share easily beat the consensus estimate. Management also offered strong sales guidance for the current quarter and announced a 10-for-1 stock split.

Nvidia soared on the news, crossing the $1,000 per-share threshold and closing up 9% on the day. The rest of the market, however, did not fare so well. The Nasdaq closed lower after opening strong on the news, and the Dow Jones Industrial Average tumbled more than 600 points, logging its worst day so far this year.

For its part, the S&P 500 saw more than 400 names in the index trade lower. Yet, on the bright side, the SPDR S&P 500 ETF Trust (SPY) held well above the $508 level that Jeff Woods mentioned as a potential make-or-break point. 

But it’s clear that Nvidia’s stellar results weren’t enough to power the broader market higher like they did the previous time around. This was due in part to the fact that investors are still trying to determine what higher-for-longer interest rates could mean for the economy and the markets. 

Getting back to how we traded Nvidia’s earnings announcement, instead of attempting to predict the outcome, we capitalized on the anticipated volatility using an alternative approach.

About two weeks before the company was scheduled to report earnings, we put on a bull put spread. A bull put spread is a neutral-to-bullish options strategy that profits if the stock price stays flat or rises.  

At the time, the stock’s expected earnings move was 142 points, or about 15% in either direction. With the stock trading around $914 a share, the predicted move was up to $1,056 or down to $772.

Therefore, we set the strike of the top leg of our put spread below that level, at 765, selling the NVDA 14 Jun 765/760 Put Spread for around $0.85. We traded five contracts in the live account, bringing our cash in hand to $4.25.

We went with the June 14 expiration, which was 38 days out and, importantly, well past Nvidia’s earnings date. This was done to give us time and flexibility in managing the position should NVDA fall more than expected. 

At the time we entered the trade, we set a good ‘til canceled (GTC) order to exit the spread when the premium dropped to $0.25.

On May 21, the day before Nvidia was scheduled to report, the price of that spread was just a few cents above our target exit price. Rather than risk a dramatic post-earning sell-off, we decided to take our profits off the table, closing the position for $0.31. 

We booked $0.54 per spread ($54 per contract) in income, or nearly two-thirds of the maximum profit. Since we traded five contracts, we pocketed $270 in cash and earned a 10.8% return on our capital ($500 per 5-wide spread) in just two weeks.

Now, had we hung in another day, our target exit price would have been hit. But, as they say, no one ever went broke taking a profit! 

What’s more, we also booked $350 in cash when our Taiwan Semiconductor Manufacturing (TSM) spread hit its target after the stock traded higher on the heels of Nvidia’s earnings announcement. We exited that trade with 80% of the max profit and a 13.3% return on our 3-wide spread in nine days.

These trades demonstrate how Income Masters utilizes options strategies to navigate market volatility and generate income without having to predict the outcome of binary events like earnings or precise stock movements.

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