Nvidia (NVDA) shares have soared about 240% this year. For those who are looking for alternative ways to take advantage of the stock's run, options may be a possibility. In the video above, OptionsPlay Director of Education and Product Jessica Inskip tells Yahoo Finance's Jared Blikre about two potential options strategies: a covered call and a cash-secured put.
Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.
Video Transcript
JARED BLIKRE: We are looking at gains of NVIDIA of 240%, kind of been in a range here, but investors might be sitting on some gains wondering what they can do with their money. And today, we're going to be talking about how that is done in the options market. And first of all, let's go here. We're going to talk about a covered call.
This is an option strategy when an investor sells a call option while also under-- while also, excuse me, owning the underlying stock. So Jessica, you have an NVIDIA stock and you think, OK, maybe it's going to go up a little bit, but I don't think it's going to go up, a lot I want to make some money in the meantime. How do I execute this?
JESSICA INSKIP: Yeah, absolutely. So you're absolutely right. The first requirement is you have to own 100 shares of the underlying security. When we have an option, we're creating an obligation to sell in this place with the covered call and what we're going to do is we're going to collect an upfront premium.
It'm-- a way that can be a reduction of your cost basis so you're reducing how much you've actually paid for NVIDIA by receiving that upfront premium, but in exchange, you're obligated to sell your shares at the strike price that you choose through that entire obligation.
JARED BLIKRE: So you could lose them? That's kind of the downside, potentially.
JESSICA INSKIP: You could. There's a give and take with options. Give is I'm getting the premium--
JARED BLIKRE: Sounds like an option.
JESSICA INSKIP: Yeah, yeah, that it is.
JARED BLIKRE: Let's get into the nitty gritty. We have a profit and loss chart of one particular strategy. This would be selling 1 February, 2016-- February 16 call, covered call for 570 at the 575 strike. And I should say February 16th is the expiration date so we've got 40 some days until then. Break down the math in here.
JESSICA INSKIP: Yep, absolutely. So first of all, we want to select about 45 days for obligation period. It's very important when utilizing options that we specify the right strike price and expiration date, but what we're going to do, we're going to receive about $500 worth of premium for this.
You'll notice this is giving us some width as in room for us to still participate in capital appreciation because when we own the security, we want it to go up in value. That's the goal. So that's our take. That's what this flat line represents up here. These two are standard deviations, which we want to-- it's a way to layer on technical analysis with the--
JARED BLIKRE: Well, options is all about math. There's a lot of math involved. It doesn't have to be intimidating though, but just kind of speak as to in general, how options can improve an investor's return here, just in general terms.
JESSICA INSKIP: Yeah, absolutely. So in this point, it's just adding additional yield while participating in capital appreciation. It's a great way to enhance a longer term portfolio. Just know that you're creating an obligation to sell your shares. But we allowed for capital appreciation. So in this case of the covered call, premium of $5 per share, about 500 total, that reduces the cost of NVIDIA slowly over time.
But if you sell, that's still a healthy gain.
JARED BLIKRE: All right. Let's go to another strategy here. Let's say I don't necessarily own the stock, but I want to get into NVIDIA. I think it's a-- might have a little bit of a pullback, and maybe I just want to be sucked into that trade, but on the other hand, if it goes up, I might be able to make some money, but break down the math here on that one.
JESSICA INSKIP: Yeah, absolutely. So a cash secured put, this is the other side of the options chain. I don't own the security. We're selling the option, so I'm utilizing the obligation to buy, so I have to have enough cash set aside to buy 100 shares of NVIDIA, but the pros, very similar. I'm going to receive that premium up front.
The give and take, though, you'll notice when we go through the real examples--
JARED BLIKRE: Yes.
JESSICA INSKIP: --is when we have that premium, we actually have upside risk. So if you're expecting a really large accelerated move to the upside, you actually would make out better just by owning the security. But the way this is positioned is utilizing a cash secured put with the intent to buy the underlying security.
We are actually utilizing options to reduce our risk basis, and the worst case scenario means you buy the stock which was your intent outright if you were intending to buy the shares.
JARED BLIKRE: Or maybe the worst case scenario is that the stock takes off and you're just left behind, you don't have any participation.
JESSICA INSKIP: That's right, but you still are on your max profit in this type of trade. So you'll notice a different structure, similar expiration, 45 days expiration, that options are complex, that allows you to have that time decay that we want as option sellers, but the strike price that we're choosing is--
JARED BLIKRE: 490.
JESSICA INSKIP: Yes, very close to the stock price because we don't own it. We don't need to account for capital appreciation. We need to make sure that we buy the security, maximize our premium so we're actually getting $22 a share on that one.
