Sunday, July 17, 2016

Low Risk Trades on $NVDA


In my post last week, I had indicated that I will share with you 
Low Risk Trades utilizing Option Tools on $NVDA. This stock met all my criteria for the most minimums I look for in an IBD style growth stock. In the month of May, it was :
  • In the Top 40 IBD (Investor's Business Daily) group
  • RS and EPS ratings were in the high 90's
  • Accumulation/Distribution rating was B+
  • Up/Down volume had been 1.4 and increasing every wk
  • Shares traded was over 10 million daily
  • Share price was above $35 ($350 million trading daily)
Earnings was due on May 13th. It is always risky to buy stocks ahead of earnings because the stock could either be supported or dumped by the institutions. That is a risk I am never willing to take. Earnings was good and the stock surged over 22% in less than 4 trading sessions. Institutions came in with buying volume when the market opened on Friday May 13.  Stock gapped up 15% in volume 500% above average daily volume. They continued buying the stock with 200% above average daily volume for the next 4 sessions. 

8 Week Hold Rule

I follow IBD rules with growth stocks and the rule states that:

"If a stock surges more than 20% in less than 3 weeks from its buy point, you should hold it for 8 weeks"

Mr William O'Neal made this rule because he found that stocks that are heavily supported by the institutions, will let the stock digest its gains for 8 weeks and slowly add to their positions soon after. $NVDA has shown a history of consolidating gains of 10% to 15% during earnings for a couple of weeks and than continue to go higher soon after that until the next earnings. It is disappointing as a retail trader to miss out on an opportunity with $NVDA to make over 28% gains within just 14 sessions. All is not lost because one can utilize Options as a tool to capture profits that you missed in a stock such as $NVDA 

Credit Spread Option Trades

$NVDA was still meeting all my stock selection criteria on May 25th except that it was extended beyond its buy point and there was a risk of stock retracing. I wasn't willing to risk $4600 buying 100 shares of stock at that time. Since it was a stock that was on an 8 week hold rule, utilizing short term Credit Spreads offered me a low risk (less than $350 @ risk) to attain a profit of $100 to $150 in less than 10 to 15 sessions (3 weeks) $NVDA has options offered every week since it is such a heavily traded stock. Here is a summary of 5 Credit Spread Option Trades done on $NVDA
  1. May 25th Trade June sell 44.5 put Buy 42.5 put 2 contracts $110 Credit:Risk $290
  2. May 27th Trade June sell 45  put  Buy 43  put 2 contracts $100 Credit:Risk $300
  3. June 13th Trade June (week 4) sell 45.5 put Buy 44.5 put 5 contracts $155 Credit:Risk $345
  4. June 20th Trade July (week 1) sell 46 put buy 45 put 5 contracts $155 Credit:Risk $345 
  5. July 1st  Trade July sell  46.5 put buy 45 put  3 contracts $138 Credit:Risk $300
I harvested profits of 92% on an average of the total credit planned. There was never more than $350 at risk in a trade at any given time. Profits were harvested from one trade and rolled into the following trade. Total profits was $600 in 6 wks. Stock only had to move up or down just a point. 

This is how I utilize options to profit from a stock that is extended but consolidating between earnings. You may want to scrutinize $ULTA which has very similar chart patterns as $NVDA

Happy Trading!

Amin
Follow me on tweeter @spotlightamin to keep yourself current daily on what is happening in the market.




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Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


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