As the Market Gives Us Lemons, This Nvidia Collar Might Just Taste Like Lemonade

No attractive equity longs? Check. No attractive fixed income longs? Check. I guess it's time for that thing I do when beggars can’t be choosy — a collar. However, even collars can be tricky when volatility rises as it has. 

So, where did I land to try to find an idea that stays true to my risk management mantra? Nvidia (NVDA) collar, out to December. More on that below.

The stock market has transitioned from a target-rich environment into a structural drought for long opportunities. While the S&P 500 Index ($SPX) remains within a reasonable distance of its all-time highs, the internal mechanics of the market have become increasingly hostile to traditional buying strategies.

The primary reason for this drought is a complete collapse in market breadth. In a healthy bull market, you want to see a rising tide lifting all boats. Today, we have the opposite. 

Currently, only 25% of S&P 500 stocks are trading above their 50-day moving average. This means that three out of every four stocks in the index are in short-term downtrends. When the majority of the market is underperforming its own average, the mathematical probability of picking a winner drops significantly, making the homework of stock picking feel like a fruitless exercise.

The Math of No Alternative

Beyond poor breadth, the equity risk premium (the extra return investors expect for choosing stocks over risk-free bonds) has shriveled.

The S&P 500 earnings yield minus the 2-year Treasury yield has recently dipped into negative territory. With the 2-year Treasury note (ZTM26) offering a guaranteed yield approaching 4% and the 30-year at nearly 5%, the incentive to take on equity risk is at a multi-year low.

For most of the last decade, "There Is No Alternative" (TINA) trade forced investors into stocks. Now, the lack of a compelling risk premium has created a ceiling that buyers are unwilling to break.

When the market offers so few clean long setups, the strategy must shift from finding the next winner to protecting current capital. This is where advanced hedging techniques — like the collar strategy — become essential. 

By utilizing liquid options markets on core holdings like NVDA, investors can essentially manufacture their own all-weather returns, creating a floor against the deteriorating breadth while still participating in the narrow leadership that remains.

NVDA has hung in, and its options market is super liquid. Here’s the daily chart, which has a “less bad” look to it. 

And here is the ROAR score. It tells the story of a market-leading stock, the king of this decade, really, that has been as indecisive as any mega-cap. That’s better than cratering like most of the rest. But this is why I use my ROAR scores not as outright timing devices, but as a system to determine when to avoid or downplay individual stocks or exchange-traded funds (ETFs). In the case of NVDA, the current message is this: it is wavering between high risk and neutral risk. That’s not something I’m buying long. Unless I have a safety net. And that’s what the collar provides.

The Bottom Line: NVDA Collar

Here’s one I picked out of the crowd. With the stock closing Friday around $173, that put struck right there is ideal for my approach.

I get upside to $195. That’s not a ton, but this is not designed to hit a homerun. It aims to test the market for upside potential in any form. The cost is low at 2.6%, and for the nine months to expiration, that 10.3% potential upside versus 2.5% worst case downside is 4:1. I’ll gladly settle for that. Because making 1% a month might end up being something investors remember when they used to consider it a mediocre return. On the long side from here, it could be a gift. When markets give us lemons, make some lemonade.

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.