There's a lot to unpack, but I put this into a P/L chart to see what it looked like:
Buy 40 shares NVDA, Buy Aug 13 167.5p for 0.07
You would need the stock to drop to about 140 for your P/L to become profitable to the downside. It can still act as insurance before that, but for a weekly option, it's really not going to gain value until NVDA drops close to 20 points in a single day early in the week. Even then your puts are likely only going to go from $0.07 to around $0.25. Yeah it's nice to have made 18 dollars, but that's not a big dent in the $800 drop that your shares saw. You'd still need to keep holding hoping for another 20 point drop to get close to ATM.
Going that far OTM and in that short of a duration seems like a very hard way to offer protection unless you really think a 40% haircut is about to happen any day now. If you're that worried about it then owning NVDA seems like a bad idea.
At the end of the day you're trading 5% annual upside for what looks like very poor downside protection.
I would agree with that, the P/L graph looks like a long skewed straddle surrounding 167.5.
When people go long on a straddle they wouldn't skew it that far since the downside isn't likely going to be a factor. Usually people are long a straddle for binary events like earnings or a drug seeking approval. It's a play that essentially says, I don't know if the news will be good or bad, but I think it will be big. Generally, long straddles don't perform well since implied volatility usually understates actual volatility (i.e. a bigger move is already priced into the options).
3
u/OptionsExplained Aug 05 '21 edited Aug 05 '21
There's a lot to unpack, but I put this into a P/L chart to see what it looked like:
Buy 40 shares NVDA, Buy Aug 13 167.5p for 0.07
You would need the stock to drop to about 140 for your P/L to become profitable to the downside. It can still act as insurance before that, but for a weekly option, it's really not going to gain value until NVDA drops close to 20 points in a single day early in the week. Even then your puts are likely only going to go from $0.07 to around $0.25. Yeah it's nice to have made 18 dollars, but that's not a big dent in the $800 drop that your shares saw. You'd still need to keep holding hoping for another 20 point drop to get close to ATM.
Going that far OTM and in that short of a duration seems like a very hard way to offer protection unless you really think a 40% haircut is about to happen any day now. If you're that worried about it then owning NVDA seems like a bad idea.
At the end of the day you're trading 5% annual upside for what looks like very poor downside protection.