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One of the most dominant themes pulsating through Wall Street in 2023 has undeniably been artificial intelligence. OpenAI chatbot ChatGPT took the world by storm and investors globally continue to scour for stocks seeking to capitalize on generative AI opportunities. After being one of the worst stocks in 2022 (dropping 50%), Nvidia’s lead in artificial intelligence chips has catapulted NVDA to be the best performing S & P 500 stock of 2023. With the semiconductor leader surpassing a $1 trillion market valuation and tripling year-to-date, investors are gearing up for earnings after the bell next Tuesday. After sifting through some third quarter 13F holdings filings (filed with the Securities and Exchange Commission this week), I noticed hedge funds have been both profit taking and reducing exposure. I can’t blame them. On pace for its best year since 2001, Nvidia stock is arguably the largest beneficiary of this investor AI excitement. With their earnings report hitting soon and considering the volatility associated with higher beta stocks, I want to buy an options strategy called a “straddle” that can profit if the stock either pops or drops. Nvidia straddle A long NVDA straddle pays off when volatility increases and the price of the underlying moves by a significant amount, but it doesn’t matter whether it’s to the upside or the downside. A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date. A trader will profit from a long straddle when the price of the security rises or falls from the strike price by an amount more than the total cost of the premium paid. The profit potential is virtually unlimited, so long as the price of the underlying security moves very sharply. Nvidia long straddle (expiring 12/1/23): Bought the December 1 st expiration $492.50 call for $23.50 Bought the December 1 st expiration $492.505 put for $22.50 Total cost to buy this straddle is $46 When determining the cost of creating a straddle, simply add the price of the put and the call together. In this NVDA example, I need the stock to either bounce or get trounced by more than 9% in order for this strategy to pay off. Nine percent is the implied volatility going into earnings, that sets the pricing of these options. For the sports-betting crowd, I am essentially taking the “over” on the expected volatility in this third-quarter earnings report, betting that the stock will move by 10% or more before December 1. If you are long NVDA outright, you may want to consider a different and more protective approach (covered call or owning puts, etc.). Owning a straddle seeks to provide opportunity for investors expecting volatility, significant volatility. The current volatility is 59% suggesting the stock has the ability to move roughly 4% per day for the next 30 days. DISCLOSURES: Long straddle and stock, firm long stock THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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