A "Win-Both-Ways" NVIDIA Trade Ahead of Friday's Fed Meeting

Jackson Hole and the FOMC meeting ahead has the market a wee unnerved as I'm writing this, but it could present some excellent opportunities for long trades in some of our big performers.

And as we creep closer to the earnings trade for NVIDIA (NVDA) there's no time like today to set that trade up.

Let's take a look at both sides of the NVDA chart and enter into a trade that will deliver an opportunity for gains no matter what the outcome is at the earnings event.

The premise is the following – the earnings release will bring traders into the market – and though we don't know the direction, we are able to estimate the magnitude of the move using some nerdy math that I will save you from (hence, averting the potential of your eyes glazing over).

Trade structure – the long call butterfly AND the long put butterfly

The long call butterfly

A long call butterfly is positioned so the ‘long wing' of the trade gives us a likelihood of returns, while using the short wing to finance part of the trade.

The long call butterfly- this is a long call spread (a bullish position) and a short call spread (a bearish position) that share the middle strike.

Buy to open 1 NVDA 13 SEP 130 calls

Sell to open 2 NVDA 13 SEP 140 calls

Buy to open 1 NVDA 13 SEP 150 calls

The call butterfly above will cost approximately $1.22 (the max loss for this position) which makes the max profit $8.68 (outside of commissions). Total profits will begin to erode if the price of $NVDA stays above $140

The long put butterfly

A long put butterfly is positioned so the ‘long wing' of the trade gives us a likelihood of returns, while using the short wing to finance part of the trade.

The long put butterfly- this is a long put spread (a bearish position) and a short put spread (a bullish position) that share the middle strike.

Buy to open 1 NVDA 13 SEP 105 puts

Sell to open 2 NVDA 13 SEP 95 puts

Buy to open 1 NVDA 13 SEP 85 puts

The put butterfly above will cost $0.70 (the max loss for this position) which makes the max profit $9.30 (outside of commissions). Total profits will begin to erode if the price of $NVDA stays below $95

If we take both sides of these trades we will have a maximum loss of around $1.92 opening room for profit all the way to $8.08 or $808 per position.

The strategy result provides three choices to exit the trade.

1. To sell the entire butterfly spread after earnings once the middle strike of either spread is tested – that means we look at setting an alert for $140 and for $95 – as we are looking for either butterfly to deliver the positive results we are looking for here.
2. To sell the spreads once it hits your loss threshold as determined by personal risk- this will happen with extreme movement.
3. To sell the spread into the week before expiration, if all is going well and you have decided to hold the trade into closer to the end of expiration (I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this).

If you want to hear more about how I trade, I help traders in the Benzinga Pro live chats every day. Click here to learn more and see how you can join in.

Image via Shutterstock