The stock level when the parabolic Nvidia rally may finally cool off and how to trade it

Published Fri, Mar 8 202411:09 AM ESTUpdated Fri, Mar 8 20241:13 PM EST

The magnitude of Nvidia's run is simply mind boggling, with the stock adding $1 trillion in market value in about two months. Trying to short this parabolic stock is what we used to call in the trading pits of Chicago, a "widowmaker." However, I believe that once Nvidia (NVDA) hits $1,000 it might actually be due to take a breather. I want to own NVDA put options to be able to participate in a slight pullback. Nvidia is currently trading around $955 a share with a $2.39 trillion market cap as it climbs the ladder of largest companies in the world, leapfrogging names like Google-parent Alphabet, Amazon, and Meta Platforms (Facebook). The stock is within striking distance of overtaking Apple at $2.61 trillion and zeroing in on Microsoft, which is now just above $3 trillion. NVDA YTD mountain Nvidia in 2024 As I have embraced the AI-fueled rally since last November, implementing a hedge or some form of downside protection may seem senseless by some investors, but could be strategic if the music stops (or takes a pause) on the artificial intelligence party. I remain cautiously optimistic on the broader market but, markets are overextended up here. Microsoft attempted to illuminate the steep costs associated with AI services back on its earnings conference call in January, but that type of headwind for Microsoft seemingly has galvanized the need for more and more chips, pushing Nvidia shares even higher. Overbought territory Typically, an investor will buy a put if they think a stock is overbought or are concerned it will fall. With a relative strength index (RSI) level of 86, one could claim that NVDA is certainly in overbought territory. That being said, Nvidia was trading at the same RSI level of 86 in early February while trading at $693, nearly $300 ago. Downside Risk Mitigation Trade Normally I would approach a hedge or a short-term bearish view by utilizing a put spread. Meaning, I would be buying the higher strike put and then selling a lower strike put to reduce the cost of just owning a put option outright. After the extreme dislocation in Nvidia to the overall marketplace, I want to simply buy the put now and I will consider selling a put if and only if the stock goes lower. This is not a cheap put option as NVDA is extremely volatile, yet I am defining the amount of money to express my downside view. And it is important to remember, volatility moves stocks up as well as down. The Trade: Buying a regular expiration April (4/19/24) $850 put for $26.00 For every one lot put option bought, it will cost $2,600 Trade conducted when NVDA was trading $955 Buying puts is not for everyone, but with the CBOE Volatility Index at 14 and the S & P 500 setting new all-time high records almost daily, this prudent spend may be viewed wise as tax day is not that far away. DISCLOSURES: Long the puts and short the stock. Long SOXX (11.27% NVDA exposure) 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.