With Nvidia at record highs, here's an options trade to protect against a possible near-term decline

Published Fri, Feb 23 202410:40 AM ESTUpdated Sat, Feb 24 20248:03 PM EST

Nvidia continues to surge and vaulted above a $2 trillion market cap in the wake of yet another blockbuster earrings report. The leading artificial intelligence global play has added over $1 trillion in market cap in just the last four months. Yes, you read that right. For those considering either booking profits or protecting downside risk in NVDA, here is an options trade in the event this chip-making rocket ship gets low on fuel in the short-term. Up nearly 300% over the past year, this leading developer of graphics processing units (GPUs) fueled the S & P 500 to another new record above 5100. Although investors' thirst for Nvidia seems insatiable, the opportunity for the stock to back-and-fill should present itself as this gap higher from $500 to above $800 seems overdone. (RSI levels are flashing overbought in NVDA) The trade I want to buy a put spread to protect from a potential downdraft in NVDA in the event the stock reverses course after all of the earnings-related options expire this week. When buying a put spread — similar to buying an insurance policy — an investor will be laying out capital in order to protect downside risk. Buying an OTM put while selling a lower OTM strike put (to collect some premium) assists traders in defining the amount of capital an investor must spend to establish a put spread. Buying a Nvidia put spread: Bought the 3/15 (Friday) expiration March $750 put for $10. Sold the 3/15 (Friday) expiration March $650 put for $1.30 The result in the sale of the OTM $650 put (as NVDA was trading $815 at the time of this trade) and the purchase of the downside $750 put results in a debit spread costing $8.70 or $870 for every one lot. I am still long NVDA, although I have been trading these markets long enough that I believe we will see some of the air come out of this balloon. That being said, the AI revolution is here and still in its infancy — and Nvidia will be a leader despite the rise of chip producing competition in the next few years. DISCLOSURES: 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.