Exploit Nvidia's rise through a high-reward, low-risk option strategy

In this brief, we will deploy a high-reward, low-risk strategy through equity options on Nvidia Corp. $NVDA. With a bullish expectation devised through fundamentals and technicals, we expect a net positive expectancy from this perspective. NVDA reports its Q1 earnings in the final week of May, putting this stock in an optimistic position for buyers. It is supported by an overall market structure, especially in the tech basket, the Nasdaq 100. Briefing Date: May 10, 2025

Market Focus: Equities & Options (US)

Time Horizon: 3 weeks

Distribution Time: Post-Market

Market Overview

NVDA stock plunged 19% in Q1, outperforming the stock market index S&P 500's decline of 4.6%. It rebounded 5.6% in Q2 while the index rose only 1.3%. This is mainly due to potential semiconductor tariffs from the Trump administration, which would restrict NVDA's advanced chip sales to China. The stock and the rest of the equities have taken a big hit on proposed "Liberation Day" tariffs from the US government. Semiconductors are at the core of geopolitics, and the rest of the chip sector stocks, except AVGO, TSM, AMD, SMCI, and INTC, have been significantly sold down and have lost the gains made since last year. NVDA leads the sector pack with a reasonably strong position in the semiconductor domain. NVDA's past two quarters' earnings have been lackluster, and the stock has been plunging since mid-November last year after making a high of ~$152 per share. The Current Market Price (CMP) is about $165 as of Friday's closing.

We expect the stock to rise until its earnings and the following factors support our reasoning. Although the position we deployed is a low probability, high reward, low risk option strategy with a high delta option spread in the money, we have a technically high probability bias in its direction. We intend to have the stock exposed until its earnings and close the position before earnings to protect potential profits from uncertain earnings outcomes. Therefore, with a short span of about a couple of weeks, we will explain our trading plan to exploit its upward move and potential adjustments should there be an adverse move. However, highly unlikely to go downward unless new tariffs are introduced until its earnings event.

Chart

Nvidia Corp. weekly chart bullish trade perspective

Signals and analysis are easier with less noise on a higher time frame. Therefore, as usual, we started our study with monthly, weekly, daily, and 4-hour intervals in that order of descent. The following are the supporting arguments for a strong technical basis:

• NVDA stock has made a series of consecutive higher highs for the first time since the end of Q3 2024, posing a trend change.

• The yellow zone bottom indicates a strong bottom support formation. We had long liquidity come in thrice in Q3 and Q4 of 2024 and now in Q2 2025, post the 90-day pause announced after liberation day tariffs. This is a critical support zone, meaning the stock could likely indicate a trend change after a significant drop from its highs.

• The green trend line drawn from its recent high in February towards the bottom has been broken, indicating a continuation of the buyers' upward momentum.

• The relative volume (RVOL) is substantial (more info here)

• Daily True Range compared with Average True Range is strong.

• MACD and RSI indicate a buy signal confluence under the oversold region.

• A double bottom pattern on the weekly chart forms a typical "W" move. Therefore, the stock is expected to increase and rise towards the next liquidity of orders indicated by the yellow zone above. This is natural, and markets move from liquidity zones. Hence, higher time frames are better for analysis with less noise.

• Fundamentally, we saw no reduction in the AI trend globally. According to big banks Goldman and JP Morgan, we will see a seismic shift in the global workforce as AI disrupts every possible industry, with an average global GDP increase of about 2% per annum. NVDA, having a first entrant advantage in AI computing power, has chips capable of training large and very large AI models. We expect a modest increase in their guidance for the rest of the year, although their earnings could be heavily impacted due to the trade war and US chip sales restrictions. The Trump administration has also lifted the Biden-era chip restrictions placed on it last year, giving a little leeway for the stock to move upwards, at least into its earnings, in our opinion.

• These factors contribute to a bullish case for the stock. We intend to exploit this through a trade perspective in options spreads that yield a very high reward for a bit of risk. Looking at the options pricing mathematical equation (variation of Black Scholes), this is a low probability trade. Still, since we have established a strong directional bias, this will take care of the probability of the trade.

  
  

Trade Analysis

Bull Put Spread Strategy (High delta in-the-money options)

We deployed an in-the-money put credit spread and received a good amount of credit upfront. The following are the details of the trade and the trade plan.

Trade Details

• Strategy: Bull Put Spread (Vertical Credit Spread)

• Underlying: NVIDIA (NVDA)

• Expiration: June 20, 2025 (42 days to expiration)

• Short Put: Sell to Open (STO) NVDA June 20 135 Put

• Long Put: Buy to Open (BTO) NVDA June 20 134 Put

• Credit Received: $77 ($0.77 per spread, one contract = 100 shares)

• Margin Requirement: $23

• Max Risk: 2% of account size

• Trade Objective: NVDA price surges to 130+ by May 28, 2025 (earnings date), close position a day before earnings for a profit.

The trade has an excellent reward-to-risk ratio of about 4:1. With 42 days left until expiry, the premium decays as the stock moves upward due to negative delta (delta reduces as stock rises for put options). This is coupled with positive theta (time decay) as the options approach the expiration date. Theta is an extrinsic value, and the delta is an option's intrinsic (absolute value) based on its price relative to the strikes. At expiry, options will have only intrinsic value.

However, due to the "pre-earnings drift" being common among large-cap stocks, with rising optimism on strong results before earnings, the options will also increase implied volatility, making the premiums stay higher for longer. IV is high for expiration just before the earnings event on May 28 and doesn't have much effect for longer-dated options post the expected earnings date. So, in our case, the June expiration is optimal. We may have a slight assignment risk as the options sold are in the money, but this is minimal in our experience. Should there be an assignment, one should assume max. loss realization and deliver the shares by exercising the long leg of the spread. In any case, this is a defined risk strategy and is scalable and sustainable over a series of trades in the long term. This is not found anywhere online or can hardly be found in the textbooks, and the retail industry is unaware of the advanced options strategies. This strategy is best when applied to European style (exercise style, not actual European options) and not to American style options, which allow early exercise anytime before expiration.

Payoff Profile

NVDA Price at Expiry	Profit / Loss
≤ 134	-$23 (max loss)
134.50	-$11.50
135	$0 (breakeven)
≥ 135	+$77 (max profit)

As the stock rises towards the 135 level, the options become at-the-money and lose premium, thereby yielding profit from the credit received selling the put vertical spreads. As you can see from the payoff profile, there is much to gain and little to lose from this trade perspective. However, we will close the position and lock profits before earnings.

Nvidia Corporation's payoff profile for the vertical credit spread strategy

There's nothing much to do regarding adjustments, and we don't typically place any stop losses for our trades either.

Final Thoughts

Expect some volatility in the next weeks with trade talks and policy uncertainty from the Trump administration surrounding semiconductors. As mentioned in the trade, keep the risk minimum to 2% and be prepared to lose before entering this position.

In an adverse scenario (unlikely), if the short leg is assigned shares, you may have to exercise the opposite long leg and deliver the shares back, with maximum loss realization, which is the margin charged by the broker at the time of entry.

We will close the position just a day before earnings, irrespective of the unrealized profit size. Remember that there's no positive utility in closing these options if the unrealized value is higher than the max loss (margin at the time of entry). In such a case, please don't panic and leave the position open as premiums always converge to max loss (margin) at expiry, or let them get assigned/exercised. This trade perspective is for educational purposes only and should not be taken as financial advice.