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90% Options Win on NVDA: Why I Went Long and Short at the Same Time

Most options traders have a limited mindset. They simply use options as substitutes for stock.

But if you understand some basic options concepts, you can speculate on the single most important element in options – volatility.

You're about to see how we did it for a 90% overnight gain in NVDA:

This is obviously not a typical trade — but there are lessons to be learned, so it's worth going over.

Raise your hand if you had an opinion on NVDA going into earnings last Thursday. You're not alone!

Now, it seems like most traders only considered two scenarios:

  1. NVDA beats and stock rallies hard
  2. NVDA misses and the stock collapses

Here's the problem with that limited mentality: it completely misses a major benefit of options: that you don't have to be right about a stock's direction to make money.

In fact, the highest-probability strategy for NVDA was focusing on whether it would move big — NOT merely whether it would move up or down.

Capitalizing on volatility — or the size of a stock's move — with options is nothing new. The real challenge is:

  • Figuring out when to use them
  • Picking the right contracts

With Options In Play, I constantly screen for setups that can make money from increases in volatility.

Heading into its earnings report on Thursday, the market was pricing in about a $20 move in NVDA.

But my research showed the potential for a much bigger move than that. In other words, NVDA options were too cheap.

NVDA had broken down sharply in October, losing the bottom of its 2-year aggressive uptrend.

Also, tech sector volatility was expanding, semi stocks were moving huge after earnings, and NVDA's average daily trading range was larger than normal.

And key areas of resistance and support were nearly $25 – $30 points away in either direction.

The market was missing all this, creating an opportunity to use a strangle to capitalize on the underpriced options.

The Options in Play newsletter put together the following trades:

  • A Dec21 $225/$240/$255 call butterfly
  • Dec07 $175 – $165 put spread

In plain English, we went long AND short NVDA at the same time.

We were speculating that one side of the trade would lose, with the other side winning big enough to leave a profit.

(we teach trades like this in  Options in Play)

This got us in for just $3.42.

And after the company issued ugly guidance, the stock cratered to send the put spread deep in the money.

The put spread shot up to $6.50 for an overnight gain of around 90% on the overall strategy. The call butterfly lost all its value, but the put spread gained more than enough to leave a nice gain.

And it was fast. The trade was initiated on Thursday afternoon, and closed in the first 15 minutes of trading on Friday.

Volatility is back and it's not going anywhere. And if you are not looking to capitalize on crazy swings in stocks, you are missing the boat.

And don't be intimidated by these types of strategies – we specialize in risk-defined trades so we know exactly what the potential downside of any trade may be.

Volatility is back and it’s not going away anytime soon. Capitalizing on crazy swings doesn’t mean you have to have crazy risk. Options are a fantastic tool in a fast moving market and it’s time you put their power to work!

In a fast market, options should be in your arsenal.

If you want my help in putting them to work for you, check out a trial to Options in Play.

Daniel Darrow's Positions as of 4:00 p.m. ET on 11/19/2018: