Nvidia Inc (NVDA) stock is down from its recent peak, and put option premiums have fallen as a result. However, put options still offer attractive income for short sellers in nearby expiry periods for out-of-the-money (OTM) strike prices.

NVDA closed at $138.25 on Friday, Nov. 29, down from its recent peak of $148.88 on Nov. 7. That was before Nvidia's Nov. 20 release of its fiscal Q3 results.

I discussed those results in a Nov. 23 Barchart article, “NVDA Stock Looks Cheap to Value Buyers Based on its Huge FCF Margins.” I discussed how NVDA stock could be worth as much as $179 per share over the next 12 months based on its strong free cash flow (FCF) and FCF margins.

Investors may want to take advantage of the stock's weakness now to sell short out-of-the-money (OTM) puts. That way they can gain extra income while waiting for NVDA stock to eventually hit this higher price target. Moreover, it provides a disciplined way to set a lower buy-in price.

Shorting OTM Puts

In a prior article three weeks ago, I discussed shorting out-of-the-money (OTM) puts at the $130 strike price for expiration on Nov. 22. This can be seen in the Nov. 5 Barchart article, “Nvidia Put Option Premiums are Sky-High - Good for Short Sellers Ahead of Earnings.”

As it turns out this short-put play expired worthless (that's good for the short seller). The investor kept all the $4.00 premium income for a 3.0% yield over 3 weeks (i.e., $4.00/$130.00 = 3.08%). 

Moreover, the $13,000 in cash that was secured as collateral to buy 100 shares at $130 is now freed up. That allows the investor to do another trade with this capital.

Since then, the short-put yields have fallen, but still provide good income. For example, look at the Dec. 27, 2024, expiration period, less than a month away.

The $132.00 strike price put option expiring Dec. 27 has a bid side premium of $2.63. That provides an immediate short-put yield of 2.0% (i.e., $2.63/$132.00 = 0.01992).

This means that an investor who secures $13,200 with their brokerage firm can then enter a trade to “Sell to Open” 1 put contract at this strike price. The account will then immediately receive $263.00. Hence, that investor makes an immediate yield of $263/$13,200, or 2.00%.

As long as NVDA stays over $132.00 the collateral of $13,200 will not be assigned by the brokerage firm to buy 100 shares. So, in effect, the investor stands to make a very good yield (2.0%) over the next four weeks.

For example, if the investor can repeat this every month for a quarter, they have an expected return (ER) of $789. That represents 5.977% of the $13,200 invested every month over the next 3 months.

Downside Risks

Moreover, shorting OTM puts allows an investor to set a lower buy-in price target with a low breakeven point. For example, after receiving the $2.63, the investor's breakeven point is 6.4% lower than today's trading price:

   $132-$2.63 = $129.37 breakeven

   $129.37 / $138.25 spot price -1 = 0.9357 -1 = -06.42, i.e., 6.42% below the trading price 

That provides very good downside protection and could help defray any unrealized losses after having the put assigned if the stock falls to $130 or lower. Here is an example.

This 2.0% short put yield can be added to the 3.0% yield made earlier as described in my prior Nov. 5 article. Doing these two trades will have provided 5.0% in income. 

At the time on Nov. 5, NVDA stock was at $139.26, so it has dropped $1.01, or just 0.725% (i.e., -$1.01/$139.26) over this period. Therefore, the net result, assuming the stock stays flat (i.e., at least over $132.00 over the next 4 weeks), the investor will have made a 4%+ expected return (ER) in 2 months:

  i.e., ER = 0.03 +0.02 -0.00725 = 0.04275 = +4.275%.

That works out to an annualized ER of about 25.65% (i.e., 4.275% x 6).  This is a very good return, even if the stock stays flat.

Moreover, even if the investor buys 100 shares from having a short-put play assigned, the NVDA price target of $179 for NVDA could potentially give a 29.5% upside. That shows that continuously shorting OTM puts in nearby expiry periods and also owning NVDA shares is a very long-term good play.