Markets have continued their massive rally since the beginning of the year. Over the last 3 months we have seen the Nasdaq names lead the charge which has been due to movement in many of the technology stocks. We have seen names like AAPL, AMZN, and NVDA rally straight higher since the end of December. We are seeing many of the tech stocks up 20-40% just in the last few months.
As a result of this rally we are no facing a very overbought market that looks to be running low on energy. We are now looking for a period of consolidation or even a reversal in the coming weeks. With this in mind we are going to look for a neutral to bearish trade for this weeks Options Trade of the Week.
For this trade we are going to use Nvidia (Symbol:NVDA). Instead of buying a long put option as a bearish trade which would only give us one way of making money (if the stock moves lower quickly) we are going to instead use a strategy that will give us a higher probability of success. For this week’s trade we are going to sell a call spread.
We will be using the weekly options expiring on April 26. This options have 16 days left to expiration. We are going to sell the 197.5 call and buy the 200 call at the same time. This leaves us with a fully risk defined trade. At the time of this article we are able to get filled at $.82 or $82 per spread. This is our maximum profit potential. We are risking $168 per spread to put this trade on which is our max loss.
We make money on this trade as long as price stays below $198.32. With the stock currently trading for $192.14 we can still make money if the stock moves $6 against us. The only move that hurts us is a move above $198.32. We also make money from time decay adding up and from volatility decreasing.
For a complete walk through of this trade make sure you watch the video below. If you have any questions feel free to post a comment on the blog. Let’s see if we can make some money on this one over the next 16 days.