Nvidia (NVDA) stock has been clobbered since announcing its Q2 results on Aug. 24. NVDA stock is now down 13% in the past week, and is off 23% in the past month. As a result, the stock has attractively high option premiums that provide good income opportunities.
The company reported significantly lower revenue and earnings which was more or less anticipated by the market. As it stands the stock trades on a forward P/E of about 40.6x for the year ending Jan. 2023. And for the year ending Jan. 2024, the average of 38 analysts is for earnings per share (EPS) of $4.67, up 34%, lowering the forecast P/E to 30.2x.
Most of its troubles relate to lower GPU sales for both the gaming and the crypto mining markets. Once those industries turn around, one might expect to see NVDA stock rise significantly.
In the meantime, the stock's option premiums are now very high. This provides good income opportunities for investors who sell out-of-the-money (OTM) covered calls, and also OTM cash-secured puts.
Let's look at some examples.
OTM Covered Calls with NVDA Stock
The table below from Barchart shows that for call options expiring on Sept. 30 a $155 strike price about 10% above today's stock price of $141.15 offers a premium of $2.28 per call contract.
This means that the investor who buys 100 shares at $141.15 for $14,115 can immediately receive $228 by selling one $155 call contract expiring Sept. 30. This represents a yield of 1.615% for the covered call investor and an annual yield of almost 20% (i.e., 1.615% x 12 = 19.38%). That assumes the premiums stay this high each month.
Moreover, if the stock were to rise to $155 by Sept. 30, the investor would make an additional 9.8% capital gain. The high premium also provides a degree of protection if the stock were to fall from here.
Cash Secured Put Income
Another example of receiving income from high option premiums is by selling out-of-the-money (OTM) cash secured puts on NVDA stock. For example, the table below shows that the $125 puts for Sept. 30 offer a $3.18 premium.
This means that if an investor were to send $12,500 to a brokerage account and then sell one $125 put contract, he would immediately receive $318 in his account. That represents an immediate return of 2.54%. And NVDA would have to fall by over $16 to $125 or 11.4% before the investor would have an obligation to purchase NVDA shares at $125.
In fact, these put returns are very juicy, as you can see. An enterprising investor might be willing to sell a put contract at $135 by putting up $13,500 with his brokerage firm. That would provide an income of $630 immediately to his account. That represents a gain of 4.66% should the stock fall by $6.15 to $135 by Sept. 30.
On the other hand, the put investor has no potential capital gain upside if the stock rises as the covered call investor has with his short call investment. This is why some investors sell both OTM put and call options for the same expiration period. At least that way if the stock rises there is the possibility of a capital gain.
Either way NVDA stock now offers option income investors attractively high premiums.
More Stock Market News from Barchart
/Technology%20abstract%20by%20TU%20IS%20via%20iStock.jpg)
