Stock Market

Recent industry and macro factors caused Nvidia (NASDAQ:NVDA) stock to dip, sparking concerns about its 2023 rally. Despite a slight decline, don’t dismiss the ongoing generative AI mega trend driving its powerful performance. 

That said, investors should recognize the limits of Nvidia’s growth potential despite the market’s enthusiasm for AI.

While NVDA benefits from AI chip demand, its valuation may have already factored in this advantage, leading many to join the party when most of the upside is priced in.

Now, being the leading player in AI chips positions, Nvidia to gain significantly from this trend. Thus, this is a stock that’s likely to see continued strong growth over time. So, how do investors play this gem?

Here’s why I think a covered call or put selling strategy may be the best option right now.

The Obsession with Nvidia

Nvidia has remained among the top growth stocks, it has rewarded investors for buying and holding. As more of the company’s customers gravitate toward AI application development, Nvidia’s powerful chips will continue to see increased demand.

Other high-growth sectors, such as machine learning, big data, cybersecurity, gaming, and crypto, among others, all use a significant number of the company’s chips. Thus, when one of these high-growth sectors is running hot, so too is NVDA stock.

Now, given the breadth of Nvidia’s incline this year, it’s clear that much of the enthusiasm around the AI boom is priced in.

While Nvidia has seen this hype translate into real revenue and earnings growth (as well as forecasted growth), it’s also true that much of it may already be priced in.

This year, NVDA stock surged from $143 to $480 this year, now aiming to surpass $500. Anticipation builds for the Q2 2023 earnings report, which could either boost or undermine the stock, reminiscent of the dot-com era.

Why Selling Puts or Calls is An Option

I grasp the concept that owning stock represents a share in a business, yet at times, a stock can deviate from its business value.

This seems to be the case with Nvidia, whose shares trade at approximately 41-times sales, a steep ratio for earnings, but we’re discussing sales here. 

So, for those looking to maintain (or add) exposure to Nvidia right now, but are worried about valuation, there are two excellent options to consider.

For those who own Nvidia at current levels, selling call options is a great strategy to consider. One can essentially lock in one’s gains in NVDA stock at a specific level at a date in the future, while raking in premium for doing so.

Thus, for those betting on a market staying put or declining over the medium-term, this is one way investors can take profits down the road, and lock in premium for doing so.

For those who don’t own Nvidia but want to (at a lower price), selling puts could be a great option. Selling a put contract gives the writer (put seller) the option to buy that contract at a lower price in the future.

Those with the ability to sell put contacts (one contract accounts for 100 shares) can do so, limiting the price one will have to pay for said shares (though also paying a premium to do so).

What Now

These are two strategies I think could bode well for long-term bulls, but short-term skeptics on Nvidia. Currently, I find myself in this category, and these two strategies are among the only that make sense to me right now.

I can’t justify buying shares at this valuation, and I’m betting most investors can’t either.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

Articles You May Like

3 Stocks That Don’t Care Who Has the Nuclear Codes
3 Stocks Under $10 With the Potential to Make You a Millionaire
7 Dividend Stocks to Sell in June Before They Crash & Burn
3 AI and Data Stocks Set to Leave Big Tech in the Dust
3 AI Stocks to Turn $10,000 Into $1 Million: June 2024