A Bearish Call Credit Spread During Earning - NVDA


Today, I am experimenting on trading options during earnings reports with the goal of developing a competence in all areas of options trading.

Today, I am implementing a bearish call credit spread on NVIDIA and trying to take advantage of a likely volatility crush, which reports earnings tomorrow (August 28, 2024).


I will set the strikes of the spread to 149 and 150 with deltas of 14% and 13%.  This limits my risk to $100 (plus the $1.20 transaction fee) minus the premium of $11.  The implied volatility is elevated to about 130%, where it is typically about 70%. (Note: I typically try to keep delta at about 10%, but I chose a 149 strike with a delta of 14% because it has an adjacent strike of 150, which limits my risk. Strikes greater than 150 had intervals of 5, increasing my risk.)


Ideally, NVIDIA does not jump 15+% above the breakeven of $149.11 (see screenshot below) and cost me $89.


Does this trade setup make sense?  What would have been a better trade?


  • Have a larger spread to capture more premium?

  • Decrease the short call strike to capture more premium?

  • When should I have timed this trade?


Figure 1.  The strikes for the bear call credit spread.


Figure 2.  The option chain for NVDA on August 27, 2024.


Update: August 29, 2024


After a disappointing earnings and guidance (despite beating estimates), NVDA shares dropped by about $11. Below, we show how this affected the option chain. We see that delta for the 149 strike price decreased from 0.138 to 0.005, but implied volatility increased from 135.41% to 165.69%. I am not sure why this is the case.

Figure 3.  The option chain for NVDA on August 29, 2024.


In net, so far, the spread has netted about $9 so far.

Figure 4.  Progress on the bearish call spread as of August 29, 2024.  We are up about $9.


Bonus Material: The Broken Wing Butterfly

To get a feel of the broken wing butterfly, I also traded one with a total delta of 10%.

I selected the short put strike with a 10% delta at 109. The long put strikes are at 105 and 110.

Figure.

Here is the trade setup. The premium is $26 minus fees and the maximum gain is $126. Breakeven is at $107.74.n





1. How to trade a broken wing butterfly -
https://www.youtube.com/watch?v=QBf0GiJCY0g

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