[Options] Stick With Winners

Sean McLaughlin
October 21, 2020

Sometimes we traders overcomplicate things. With so many choices, so many moving parts, so many headlines, so many things vying for our attention on a minute by minute basis, it is easy to become overwhelmed.

It seems so obvious, but often the smartest -- yet the simplest -- thing to do is just keep investing in winners. Objects in motion tend to stay in motion, right? And if we can construct options trades that take advantage of that momentum while defining our risks in case we happen to be the last suckers to pile in before the reversal -- then we should do that all day long and twice on Sundays, right?

With that in mind, today's trade is a momentum name that is no stranger to anyone who has been paying attention to hot names this year.

Here's the chart of Nvidia $NVDA:

This stock has been a monster ever since defining support in 2019.

Here's what Steve Strazza had to say about $NVDA in our latest Under the Hood report:

In early July, we said we wanted to be long Nvidia if price was above 390 with a target at 560. It’s recently achieved our target and is now consolidating right around that 550-560 level.

We want to own Nvidia as long as price is above 550 with a 3-6 month target just above 800. This would be another big move for a stock that has already booked some major gains since its 2018-2019 lows. As we always say, we like to stick with the winners, and these outperformers have yet to give us any reason to stop doing so.

Today, $NVDA was trading above $550 and I'm comfortable getting long here. Due to the expensive share price and somewhat elevated implied volatility in the options, I'll be employing a call spread to keep the costs down and risks manageable. While it would be wonderful to ride this stock all the way to Steve's price target, I'm more interested in a quick tactical gain.

Here's the play:

I'm buying a $NVDA January 550/600 Bull Call Spread for $19.50 or cheaper. This means I'll be long the 550 calls and short an equal amount of 600 calls for a net debit. This is a defined risk spread and most I can lose is the debit I pay at entry.

If $NVDA shares close below $500 at any time during this hold, I'll consider the trade thesis busted and I'll look to exit for whatever I can salvage.

If $NVDA goes our way, then I'll be looking to close this spread at around $35.00. This would represent capturing a smidge more than 50% of the maximum profit potential in trade. Take my wins and run.

If you have any questions on this trade, please send them here.

~ @chicagosean

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