Tuesday, February 15, 2011

Finally back on the wagon with both Trading and Blogging - Ahhh...Nvidia.

I won't bore you with the should've / would've / could've.  Instead I'll just say I've been delinquent in updating my blog and tonight I'll start again with a variety of topics - ranging from finance, recipes I've doctored, places to eat, world stuff, etc.


Tonight though I'm going to begin with one of my "geeky" passions...financial markets.  Specifically I'm going to explain my thoughts on Nvidia (NVDA) and the equity and options trades I have in place for the earnings announcements tomorrow. I have had these trades in place now for a few weeks, but tonight's blog from the WSJ (Tomorrow’s Tape: NVIDIA, Deere and a Slew of Economic Data) reminded me of the earnings announcements and economic data coming out early tomorrow morning.


Starting at 8:30am EST we get the following data points

  1. 8:30 - Housing starts
  2. 8:30 - PPI (Producer Price Index)
  3. 9:15 - Industrial Production
  4. 10:00 - Geithner talks to Congress
  5. 10:30 - EIA Petroleum status
  6. 14:00 - FOMC meeting minutes released
WOW - that is a lot of data points being provided to the market tomorrow.  

Things I'll be paying attention to out of all these are #1, #2, #3 and #6.  I am by no means an expert, but I am expecting us to see a continued slow pace in Housing starts.  I expect this because we still have a high un-employment rate, getting a new mortgage is still requiring a big upfront investment...and my perception is we still have a huge inventory of existing and empty houses.  I am much more interested in the second data point as it will give us some indication of what to expect in the coming months. The PPI is what producers are charged for taking inputs before they grow, build, (whatever) the final goods for the Consumer. If we see a significant increase in the PPI we will likely see a significant increase in the CPI (Consumer Price Index).  That increase will translate into higher prices for the Consumer when we are just coming out of a pro-longed and some are calling the 'Great Recession'. Finally we'll get the meeting minutes from the FOMC (Federal Open Market Committee) which you may know better if I mention the head Ben Bernanke :).  Some of the comments I've seen recently indicate a few of the members of the FOMC are becoming hawkish...which roughly means they are starting to discuss raising interest rates.

All of that is likely a lot to think through...which is why those data points coupled with the fact NVDA is announcing their earnings for last quarter tomorrow I have put on a few different trades. I'll make all of my following comments first by saying I'm not suggesting or providing any investment advice or providing a buy or sell opinion...only my thoughts and actual trades I have placed on NVDA in preparation for tomorrow.  Secondly if you have not traded options before and don't understand them...please do not do so until you fully understand the risks associated because while they are very lucrative they can be very risky if you don't understand how they work.  If you'd like I can walk you through options and options trading, but 888options.com is a great resource, and if you are willing to pay money to learn more about options I'd point you at OptionsAnimal.com.

So...on to my trades.
First I've been a shareholder of NVDA for quite some time now so my first trade is to protect the recent run-up in NVDA since the beginning of this year.


As you can see there has been quite a bit of price appreciation since that time...in fact we have seen a 46% increase. The other details you see in my chart are 5, 21, 55, 100 and 200 EMA (Extrapolated Moving Averages), Bollinger Bands, RSI indicators and MACD.

  1. Covered stock - Bought March $20 strike put options 
  2. Collar w/ stock - Bought 100 shares @$23.52, sold a Sep $30 call strike for a $1.40 credit and bought  a Mar $20 strike put for $.47 - with a max return of $7.41 per share and a max loss of $2.59 per share.
  3. I have a few additional trades, but we'll keep them simple this time as protective options...in case you're interested though my additional trades are Calendar strangles which you can learn more about in future posts or at 888Options.com (I think they talk about these).

The first trade is to protect my existing stock 225 shares at an average cost basis of $20.005.  To do this I bought two March $20 strike put options @ $.33 on February 7th - creating a Covered Stock position. Doing this protects my investment should the stock fall below my CB (Cost Basis). Even if the stock does not fall below $20 I should make money if the price nears the $20 strike price. As of today's close the price dropped $.56 and my options are now worth $.665 already a 50% increase. Yes, I have a downside from the current level of $22.55, but in reality my actual cost basis is likely lower with selling covered calls against the stock over the past few years.

The second trade is a nice trade where I have a very clearly defined primary exit. In this case I am planning to keep the stock until September fully acknowledging if the price rises above $30 by options expiration on the third Friday of September the stock will be taken away (e.g. sold). This would be a a return of $7.41 per share or an Annualized return of 62% in 214 days, and yes there could be much further upside I'm okay with that since I have more stock.  I also have other trades in place to protect against just that case (exploding collar).  On the downside as mentioned above I'm also protected in the case the stock gets killed by bad earnings.  My $20 March strike put option will make money if the stock declines closer to and/or past $20 and the call I sold short ($30 September) will continue to lose money and I would buy back, or more likely roll up and into front months creating covered calls. Doing this will further reduce my cost basis and keep me sane :).  

All in all with the fundamental analysis I've done in the past few months I believe NVDA is in good shape especially with their recent announcements with Samsung and others. Anything is possible, but I'm pretty happy with what I've uncovered in my analysis and will be happy continuing to hold this stock before, after and during earnings.

I'm sure it isn't all clear if you aren't familiar with trading options, but I can tell you once you learn and have a good grasp ... options are a good tool for investing and trading in these markets (bull and bear).

Well that is all for tonight...later this week I'll write an update on how the Nvidia trade is faring and also provide some insights into how my Investment Club is also faring these days.

Good night and good trading / investing / working tomorrow.

Bryan

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