I’m getting bearish on semiconductors based on the recent activity on the bigger players. SMH over the last year has been definitely in an uptrend, but recent volatility this summer makes me feel like it’s getting “toppy” so I’m betting that it starts a downtrend. I would purchase SMH puts, but I’m not that confident. Rather than reverse, it may just decide to continue the uptrend and prove me wrong.
So I put in place another one of my strangles, this time oriented towards the negative so that If it does go down I will profit a lot faster and better, but I still maintain the natural risk reduction from a strangle so that If I’m wrong my losses are controlled, or if I’m very wrong I actually profit.
The “negative strangle” looks like this:
Call 170, Put 130
Total cost = 2.59
Oops, that was a typo. My put was 140 not 130.
I’m sitting on an overall profit right now where I could close my puts (for more than I paid for calls plus puts) and play the calls totally on the house, but I think that I’m holding and looking for lower lows. I don’t expire for over a month so I think I have a week or two.
Well, I got some lower lows and it closed at about the low of the day, but the movement was largely sideways. I’m holding over the weekend because it looks like it wants to break downward, as does QQQ and SPY, at least in the short term (1 mo). In the longer term (6 mo - 1 yr) you could say that we are overall bullish. I’m trading short term, but I could be wrong which is why I’m in the strangle.
With NVDA ramping up and taking all the indexes with it (SMH, QQQ, SPY). I’m now stuck in this trade. Now, I’m still bearish on NVDA and the semis. NVDA launched positive on good comments from a brokerage house, but none of those comments changes my bearish outlook. Whenever I hear a stock being talked up by a brokerage or a TV personality (especially Jim Cramer lol), I’m always more likely to go short.
So I took an uncharacteristic dive this afternoon. I bought puts on NVDA. Not a negative strangle, just straight up puts. I did it near the high of the day when NVDA was around 436. They closed a little higher today, but I only lost 8 cents on my put so far, so I’m not too stressed. If they go up at all I lose money, but I’m banking on a decline. What I bought:
December 15, 260 Put 2.46
NVDA releases earnings on 8/23 and I may be holding this through their earnings. Morgan Stanley analyst is saying he expects a positive surprise and has a price target of $500. I generally do not feel that the “experts” know crap, and I also feel like even if NVDA has a positive surprise they still might get clobbered. This is exactly what just happened to AAPL who exceeded earning expectations but lost anyway. Sometimes when you’re flying too high there is no way to make everyone happy.
We shall see…
Well, seems like everyone has been singing NVDA’s praises today. Two more brokerages and the financial news. It was pretty strong early before settling down in the afternoon. I feel like when everyone is saying it is great, that is a sure sign of a selloff. Of course, what if everyone is right and I’m wrong? It’s a popular stock and every brokerage covers it. I’m sure there will be more positive comments and upward revisions before the 8/23 earnings announcement. I’m still in puts…
NVDA gapped up a bit and was pretty volatile in the early morning which I have always said is a bad sign even though they were “up” for the day. Sure enough they broke down into the negative in the afternoon, dragging everyone down with them. I’m still bearish and in puts and feeling a bit better so far today.
Well every analyst out there keeps raising their estimates on NVDA and are universally expecting a positive surprise on Wednesday’s report. One raised their target stock price to $800. They keep hitting higher highs and may even challenge their all time high from earlier this summer. If you look at their long term chart it’s just ridiculous.
One side of me says that there is no way they are going to be able to make everyone happy. When everyone without exception is talking up the stock, that is exactly when you go down. In fact they could meet or exceed every estimate and still get clobbered just because they did not deliver a good enough surprise. This is what happened to AAPL earlier this month. So I’m still in my puts which actually don’t expire until December so I actually have some room to wait for an adjustment.
But I’m still nervous. So I have now added some inexpensive calls so that what I now have is a strangle of sorts, that still leans on the down move. NVDA tends to have large moves from earnings. Last time, their positive surprise shot them up 24% in 1 day. In my current situation, if NVDA goes down by ~15% I will have a 196% profit (about triple my money), but if they go up by ~15% then I will have an 18% profit. This is not a classic strangle because my calls expire much quicker than my puts and I have more puts than calls. This made the calls a lot less expensive but also made them give a much higher profit in the very short term. My thinking is that if NVDA shoots upward in a large 1-day gap up I need to be able to capture this quickly. And if if shoots downward I’ll make even more money because I have more puts than calls. I also believe that if it does nothing and just goes sideways (yeah right) this will still amount to a disappointment that will cause it to trend downward. On the put side I have a lot more time for this to play out because my puts don’t expire until December (my calls expire 9/8).
Anyway, I feel a lot better now that I am better protected from loss both up and down. I always prefer having a higher percentage of win rather than a higher percentage of profit.
Jim Cramer just said on CNBC to own NVDA or risk missing out.
NVDA did not gap up >15% (not even close) but they encountered heavy selling, both yesterday after-hours and today. The action today is horrible for NVDA (and the whole market). My puts are now looking pretty good.