Nvidia (NVDA) has been at the forefront of the AI-driven market rally over the past 18 months, fueled by its leading position GPUs, essential for AI computation. However, as the market becomes increasingly sensitive to the enormous capital expenditures required to sustain this growth, investors are seeking more clarity on when these investments will translate into substantial revenue. With NVDA’s earnings due after the close Wednesday, there’s significant anticipation around whether the demand for AI-related hardware remains robust. For investors who want to remain invested for the long term, but are concerned about a short-term pullback on earnings, a protection trade using options could be warranted. NVDA has been consolidating within a narrow range between $124 and $130, suggesting a potential breakout or breakdown post-earnings. This tight range reflects the market’s uncertainty and the anticipation of the earnings report. NVDA YTD mountain Nvidia, YTD Additionally, relative performance of the entire semiconductor industry against the S & P 500 has been weak on the recent rally but the earnings report could shift this dynamic quickly. Fundamentally, NVDA’s valuation has been stretched by its leadership in AI, which has led to high expectations for continued growth. With the market already pricing in perfection, any deviation from these expectations could lead to a significant re-rating of the stock. To hedge against the downside risk going into earnings, I suggest using a “put vertical spread” with the September 20 expiration: Buy the $125 put @ $7.55 Sell the 110 put @ $2.56 Trade Cost: $4.99 Net Debit Max Reward: $1,001 Max Risk: $499 This strategy offers significant downside protection, covering an approximate 14% drop in NVDA’s stock price while limiting the risk to just 4% of the position. If NVDA reports strong earnings, the upside is reduced by the cost of the put spread. However, should the stock decline significantly due to a disappointing outlook, this strategy will help mitigate losses by potentially returning 2 times the amount risked. DISCLOSURES: (Position in Nvidia) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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.
