Nvidia Pulls Back
In a post earlier this month, we looked at when to sell Nvidia (NVDA).
Nvidia shares have slid recently...
With market observers presenting a few different narratives to explain it:
- A market rotation from mega caps to small caps in advance of rate cuts.
- Concerns about possible Trump tariffs and export controls impacting chipmakers.
- Questions about whether "the AI bubble popped".
I'm skeptical of the third narrative, but let's put all three in the "too hard" pile for now and focus on entries and exits. Let's recap our exit logic first, and then we'll address when it might make sense to go long Nvidia again.
Exiting Nvidia
In my previous post, I wrote about how I decided when to exit Nvidia, giving specific examples of trading both the stock and options on it:
When To Sell: Valuation Versus Price Movement
One way to decide when to sell is to use a valuation metric, like the PEG ratio we looked at above. A drawback of that, though, is that a stock can trade at an elevated valuation for years, and you can miss out on a lot of gains that way. The approach we use in my trading Substack is going by price movement. Here are specific examples from my own trading of Nvidia.
Trading Nvidia Shares
I bought Nvidia as part of my trading Substack's core strategy, which is to buy equal dollar amounts of Portfolio Armor's top ten names, put trailing stops of 15% to 20% on them, and then replace each one with a new top ten name after we get stopped out. Using this approach, I bought Nvidia in February of 2023 and exited last April, for a gain of 259% over about 13 months (Nvidia has appeared in our top ten on multiple occasions over the last 8 years).
Nvidia (NVDA 0.00%↑). Bought at $230 on 2/24/2023; stopped out at $825.06 on 4/18/2024. Profit: 259%.
Trading Nvidia Options
One difference between stocks and options is that options expire, so there's no place for diamond hands: if you don't sell or exercise before expiration, your options will expire worthless. Most of the options trades we do in my trading Substack are spreads, where the maximum possible gain and loss are pre-defined, What I do in those cases is open a GTC order to exit at about 95% of the spread, and lower that price, if necessary, as the expiration date approaches. Here are a couple of examples of me doing this trading Nvidia options.
Call spread on Nvidia (NVDA 6.15%↑). Entered at a net debit of $2.10 on 2/20/2024; exited at a net credit of $4.74 on 2/22/2024. Profit: 126%.
Call spread on Nvidia (NVDA 0.00%↑). Entered at a net debit of $3 on 5/21/2024; exited at a net credit of $9.45 on 5/23/2024. Profit: 215%.
Those were both earnings trades. The spread between the strike prices on the first one was $5, and on the second one, $10. I placed the second trade after I started my current practice of aiming for ~200% gains on options spreads.
When I'd Buy Nvidia Shares Again
The next time I get stopped out of one of my ten core strategy holdings, if Nvidia is a current Portfolio Armor top ten name, I'll buy it again, as I did back in February of 2023, but a trailing stop of 15% to 20% on it, and let it ride again. Easy-peasy.
When I'd Place A Bullish Options Trade On Nvidia Again
I'd like to see a slightly better valuation on Nvidia with the stock still showing strong technicals. Let's quantify that. Currently, according to Chartmill data, here's what Nvidia looks like on three specific metrics (all of these are on range from 0 to 10, with 10 being the best):
- Technical Rating: 9
- Set-up Rating: 2
- Valuation Rating: 5
The technical and valuation ratings are self-explanatory; the set-up rating measures the short-term consolidation of share prices. Here's what I'd like to see before I place my next bullish options trade on Nvidia:
- Technical Rating: 6 or greater.
- Set-up Rating: 6 or greater.
- Valuation Rating: 6 or greater.
I set up an alert to notify me when Nvidia meets all three of those criteria. At that point, I'll investigate it further, and if it looks promising, I'll place another bullish bet on it.
If you'd like a heads up when I place that trade, feel free to subscribe to my trading Substack/occasional email list below. And if you're worried about the AI bubble popping, consider downloading the Portfolio Armor iPhone app to hedge your AI-related stocks.
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