In this week’s review of the best options trading strategies, our options Trading tutorial will focus on Nvidia stock.
Through an unusual entrance criteria, once again this case study confirms how a solid methodology leads to consistent profits.
Options Trading Tutorial: Setup of NVDA
Nvidia(ticker: NVDA) reported its third quarter 2019 Earnings Release on Thursday November 14 after the close of the market.
The after hours reaction was a thing of beauty in terms of market misdirection.
Hence, we are using the full action shown below for this Options trading tutorial.
This is how to read the 5-minute chart from left to right.
Each candle represents of course 5 minutes. The close Price on November 14 2019 before the Earnings Release Numbers was at 209.88.
Here are the key GAAP (Generally Accepted Accounting Principles) numbers of the Earnings Release as report on the Investors Relation Website.
- Revenue at $3.01 billion – Up 17% quarter to quarter – Down 5% Year over Year
- Gross Margin at 63.4% – Up 380 bps quarter to quarter – Up 320 bps Year over Year
- Operating Expenses at 989 Million – Up 2% quarter to quarter – Up 15% Year over Year
- Operating Income at 927 Million – Up 62% quarter to quarter – Down 12% Year over Year
- Net Income at 899 Million – Up 63% quarter to quarter – Down 27% Year over Year
- Diluted Earnings Per Share at $1.45 – Up 61% quarter to quarter – Down 26% Year over Year
- I am providing these results just as a support for the wild moves we saw immediately following the release of those numbers.
Options Trading Tutorial: After Hours Indication
Nvidia stock (Ticker:NVDA) recorded an after hours Low of $202.83 (market by the red star) and an after hours High of $218.35.
That is over a $15 swing in so 5 minutes for a stock that closed the trading session at $209.88.
From that high at 4:25 pm est, the stock went on a downtrend to finish the After Hours at about $207.
Can you imagine being a participant in that after hour will ride?
Options Trading Tutorial: Entry Criteria
The pre-market action which I labeled in the middle area is stuck in a very tight range between $208.7 and $211.6.
So, the question for any option trader at the Open of the market was what direction was NVDA supposed to go ?
Before we break down the answer, let’s examine why this was a trade to take no matter what.
The wild action from After Hours from Thursday gave us an idea about the potential move.
Whether that move was to be up (to be played by buying calls) or down (to be played by buying puts).
I am suggesting that the strike prices were given to us in the after hours on Thursday November 14, 2019.
From a close price of 209.88, the high of the after hours was 218.35 so I am suggesting a strike of $215 for calls.
The Low of the after hours was 202.83 so I am suggesting a strike of $205 for Puts.
What condition needed to be satisfied to take calls ?
What The Pre-Market Teaches Us
Well, the study of the pre-market always tell us about key support and resistance levels.
These are the foundation for any trade since we have talked before about having unemotional decisions in our trading.
Pre-market as indicated in the center area of the chart clearly showed major resistance around 211.7.
Therefore, a great entrance criteria for 215 calls was for NVDA to close above 212 on one of the 5-minute candles.
Conversely, a great entrance criteria for 205 Puts was for NVDA to close below its Pre-market low around 208.
This is the classic entrance criteria for a Post Earnings Release Options trade.
We previously showcased a similar example a couple of weeks ago on Amazon stock.
There is a small variance to this entry for the Puts.
I personally like to take the Puts trade when there is a confirmed rejection at the resistance line (211.7 here).
The reason for this is that the contracts are cheaper are that level so that was my entrance criteria on this trade.
The Exit out of NVDA Puts
In case you are a beginner in Options trading, the chart that follows may be a bit confusing.
It is showing the variation over time of the NVDA 205 weekly Puts.
Meaning the strike is 205 and the expiration date is Friday Nov 15.
This implies that this was a day trade.
Of course an option trader could have well decided to take Nov 22 Puts or any other future date.
The trade would have worked out exactly the same except the Profit percentage would have been different.
We entered the NVDA Nov15 205 Puts at 6:45 for 50 cents.
Now, if you wonder how to know the good or perfect entry to this trade or any order trade, that is okay.
It comes in due time with the experience and confidence we discussed in this article about the winning habits of a successful option trader.
I like using round level for my entries based on the budget (risk) I allocate to each trade.
When you put it an automated order, you can easily follow as the market Bids and Asks prices vary.
The trader can see the market is getting closer or away from the limit buy.
It is okay to adjust but be careful not to chase a price by bidding up higher and higher for Fear Of Missing Out (F.O.M.O).
This trade had a head fake in it as price pretended to go up.
Then it was rejected at the pre-market resistance.
Finally, it carried on with a violent move down hence the huge payout of almost 800%.
Yes, from a buy of 50 cents at 6:45am, these 205 Puts on NVDA reached a high of $4.4 at 7am.
That is quite a move in just 15 minutes.
Summary of The Trade
We reviewed how for Post Earnings Release option trade, after hours and pre-market provide a good read on the range of a stock.
Which gives the option trader a solid indication for entrance criteria into a trade.
This case study confirms our recommendation not to trade options before Earnings release.
But rather wait and see how the market reacts to the announcement and take advantage of the move.
This is another illustrations of the option trading strategies we strive to share with you as part of How To Learn To Trade Options process.
We hope you enjoyed ready this article.
Please leave us your thoughts in the comments section.
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