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To: Johnny Canuck who wrote (59333)

5/23/2024 4:54:05 PM

From: Johnny Canuck

Read Replies (1) | Respond to of 69366

Investing alternatives to chasing Nvidia’s stock using options after its blockbuster report
PUBLISHED THU, MAY 23 2024•12:19 PM EDT

Michael Khouw @MICHAEL_KHOUW

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Nvidia (NVDA) delivered another exceptional quarter . We’ll review what investors can do from here using options if they don’t want to continue chasing the rally. The concern, if there was any, for investors going into Nvidia’s results was that the incredible 409% pace of growth delivered in the prior quarter would slow. It didn’t. It accelerated to 427%; a growing growth. “The Godfather of AI delivered another masterpiece quarter and guidance that should be hung in the Louvre,” wore Dan Ives of Wedbush. Traditionally, value investing and growth investing are considered two distinct investment strategies. Value investors look for stocks they believe the market has undervalued and may be trading for less than their “intrinsic” value. Value investors often employ “bottom-up” investing, which focuses on individual companies rather than the overall market or industry. Growth investing focuses on companies expected to grow at an above-average rate compared to other companies. These companies are often in expanding industries or possess a competitive advantage that fuels their growth. Growth investors generally employ “top-down” investing, which starts with a macroeconomic perspective and then narrows down to specific sectors or industries before selecting individual stocks. It isn’t difficult looking at these cursory definitions to identify which category Nvidia falls into. AI is the biggest theme in investing right now, and Nvidia is the biggest name in it. Perhaps the only thing more astonishing than the growth rate is the fact that it would have been even higher if Nvidia was able to keep up with demand according to the company’s CEO, Jensen Huang. Looking at the sales, net income, and free cash flow trajectories of two different chip companies; late 90s tech bubble darling Intel versus Nvidia we see pretty clearly that demand for the companies’ respective products are following very different paths. The challenge for investors of course is that the exceptional performance of Nvidia is so recent. How far into the future might one extrapolate the hockey stick? Vince Lombardi famously said “Winning is a habit. Unfortunately,so is losing.” Does this mean that the recent trends for both Intel and Nvidia will continue indefinitely? Unfortunately for Intel (INTC) there’s little that can be done near-term to narrow the performance gap. Nvidia’s GPUs do things that Intel’s products don’t. So where does this leave a “value investor” who might be inclined to buy Intel, which is trading at just over 15.7 times 2025 estimated earnings versus Nvidia, which is now trading at 2 times that multiple? ‘Margin of safety’ What “value investors” traditionally seek is something called a “margin of safety”. Purchasing a stock at a perceived discount reduces the downside risk in the event that their estimates of future performance are overly rosy. Is there a way to introduce a margin of safety to a growth stock using options? One could purchase an upside call option in Nvidia here, thus risking only the premium spent. For example the September $1050 calls cost $104.60, about 10% of the current stock price as I write this, but such a trade would require Nvidia to rally at least another 10+% within the next 4 months to see profits. As an alternative one could consider a call spread risk reversal as an alternative to chasing the stock here, such as the September $900/$1100/$1200 here : Sell Sep. 20 $900 put Buy Sep. 20 $1100 call Sell Sep. 20 1200 call The upside profit potential is capped by the $1200 strike call that is sold, and by selling a downside put, one does face the risk of being “put the stock”, that is, compelled to purchase the shares at the $900 strike of the put that is sold. That does represent a more than 13% discount to the current stock price, however, and is lower than where the stock was trading before this most recent stellar quarter’s results were announced. A modest “margin of safety” relative to chasing the stock on today’s $90 rally. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.

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