How to bet against Nvidia using options if this is the top of the AI rally

Published Tue, Mar 19 202412:08 PM EDT

Nishant Pant @TheMeanTrader @TheMeanTrader

Investors have been riveted by the AI surge over the past year, however the entire chip sector and its associated stocks are displaying signs of a potential pullback. We'll review a bearish options set-up that wins if the semiconductor sector pulls back from highs. Considering this, I'm contemplating a bearish trade on Nvidia (NVDA) , utilizing a bear put spread as the trade structure. In the chart provided, I've highlighted a few notable points: RSI (Relative Strength Index): I've employed RSI to assess weakness. It's a straightforward tool - when the RSI exceeds the 70 area, a stock or ETF is deemed overbought. However, since securities can remain overbought for extended periods, it's essential to wait for the RSI to dip below 70 before considering a bearish trade setup. Downside Targets: Despite NVDA being in a bullish trend, any weakness could eventually attract buyers. Therefore, it's crucial to project downside targets to gauge how far NVDA might fall before attracting buying interest. Additionally, I've utilized Fibonacci retracements to project a downside target for NVDA. While the 50% and 68.2% retracement levels are commonly viewed as areas where a bounce may occur, I've also considered the 38.2% level, given NVDA's ongoing bullish trend. To provide further confirmation, I've also incorporated the rising 20-day EMA (Exponential Moving Average), which aligns with the 38.2% retracement level, providing confirmation. The trade The trade structure I am using here is called a bear put spread. You may find trading platforms using other names like put debit spread or long put spread, but they all mean the same. I have used $870-$860 as the strikes for my bear put spread because at the time of writing this, NVDA was showing a price of 863 in the pre-market. As long as NVDA stays above $830, this trade would still be valid and one would simply need to pick out strikes based on where NVDA is trading at that time. If NVDA is hovering around $830, a 830-820 put spread could be considered. NVDA YTD mountain Nvidia, YTD Here is my exact trade set-up: Buy $870 put, April. 12th expiry Sell $860 put, April. 12th expiry Cost: $500 Potential Profit: $500 If NVDA trades at or below my short strike by the expiration date, this trade can yield a 100% return on investment on the amount risked. With 5 contracts, this equates to risking $2500 to potentially gain $2500 -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) 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.