As we outlined on our Sunday night post, the markets were due for a short-term rebound at a bare minimum. The NASDAQ-100 had finally reached oversold conditions and was always going to rebound within the next few sessions.
We also have the Apple iPhone launch event happening today. And while Ap...
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My interpretation after reading this is nvda will move between 103-108/109ish rest of this week until the last leg down next week, could retest $100 as well. Was hoping to see the $90’s range this week!!! Will see how things pane out.
here is a question for you- Say I have 4000 shares of Nvidia at $70 a share price point in a tax advantaged account. Does it make any sense at all to sell those shares at say 125 or 130 and buy back in when the stock corrects down to say 100 a share?
I mean yes I could turn those 4000 shares into roughly 5000 shares doing that, but I also raise my price point to 100 bucks a share?
I tend to hold long term and not sell and buy back in, but was curious if its worth giving up that low price point to increase the number of shares?
When you say tax advantage, does that mean deferred? It’s almost never worth it to sell when you can just sell covered calls against the position. Let me give you an example of how that might work.
Suppose Nvidia were trading at $140 a share and you want to sell on the expectation that the stock might turn lower in the future. What you could do is sell out of the money covered calls against the position. That way if the stock drops from $140, you can make money on the covered calls. If it goes up in value, you make money on the shares until it reaches the strike price of the calls you. That way you don’t have to sell the shares at all.
In fact, this is exactly how we’re going to do things. When Nvidia reaches heights that I believe make it ripe for a correction or a sell-off, we’re going to sell long dated out of the money covered calls. We’re going to talk about this extensively in Chapter 3 of investing basics.
But here’s an example. The June $115 calls are trading at $18.07 right now. Let’s imagine for a moment that $115 for nvidia was above its all-time highs and that we felt that it was getting a little bit stretched at $115. We’re trading at $107 now, but $115 is a bit on the rich side.
Well at $18.07, we could profit on Nivida if it were to continue to rise all the way up to $133 ($115 + $18 premium). On the downside, we would get $18 of potential protection.
If nvidia were to fall $30 from its $107 price (again assume $115 was Nvidia’s all-time highs), the June $115 calls would drop to $9.45). We would have hedged out about $8.60 of the downside.
If you wanted to get a lot more aggressive and have it 1-to-1 as if you sold, you don’t have to sell. You can accomplish this by selling DITM calls. For example,. you could just sell the June $30 calls at $78.00. If nvidia falls 30-points, those June $30 calls would drop $51.50. It would give you $26.50 in downside protection. So not exactly 1-to-1 (though if you go even deeper, you can get close to 1-to-1. For example, the nvidia $10 June calls are trading at around $97 a contract. If nvidia drops 30, those trade down to $68.70. That’s basically within $1.50-$1.70 of having a 1-to-1 delta.
The point is you can preserve long-term capital gains in a position by simply selling covered calls. Personally, I don’t think it’s necessary to go 100% to the sideline like that.
By selling OTM options instead, you ameliorate some of the losses (as in the first example) while also being able to participate if you’re wrong and nvidia rallies. This happens more often than now.
You might think “I should sell at $130 and buy back,” but sometimes it never returns. So by being in intermidate-term OTM options, you get to participate in the unexpected upside.
Thx, Sam. I’m learning how to play options on the side to maximize my nvda gains. Looking forward to chapter 3 as I’m still “clear as mud”