Options Corner: Tech Sector Fallout Opens An Opportunity For Nvidia With One Critical Caveat

Last week, the market soared on the heels of President Donald Trump's pledge to make the U.S. the "world capital of artificial intelligence and crypto." Today, this ambitious directive is coming under severe fire.

On Monday, China's open-source AI model called DeepSeek R1 sent shockwaves that rattled Wall Street. Even tech juggernaut Nvidia Corp. NVDA couldn't withstand the pressure, losing about 17% in the early afternoon session.

Fundamentally, the concern centers on the prospect that the U.S. may no longer have the lead in machine intelligence. What's more, DeepSeek rivals top U.S. AI models at a fraction of their cost. This headwind could erode the pricing power of U.S. tech firms specializing in AI and negatively impact their growth trajectory.

"The Stargate project was launched in part to assert the United States’ global AI dominance and prevent China from taking the lead. If China already has the lead and is able to develop comparable AI products with cheaper, less dynamic chips and other inputs, it could result in a radical change in market perceptions," analyst Michael Gayed said.

To be fair, not all experts view the sector implosion as a detriment to Nvidia.

In particular, Cantor Fitzgerald analyst CJ Muse remarked that "DeepSeek R1 is actually very bullish for Nvidia" during an interview on Bloomberg TV. Per Muse, the development suggests that the entire tech industry is closer to artificial generative intelligence (AGI), which should further integrate AI protocols into everyday functionalities.

Statistical Backdrop Favors Nvidia But Technical Risks Abound

With the severe drop in Nvidia stock on Monday, the security is on pace to post a one-week loss of around 15%. Of course, the week is very young and a lot can happen between now and Friday's closing bell. Moreover, the bulls will be encouraged that statistically, Nvidia stock benefits from an upward bias.

Using data over the past five years, there's about a 57% chance that a position opened at the beginning of the week will be positive by the end of it.

When viewed on a four-week basis, this metric rises to approximately 66.3%. In other words, as time goes by, Nvidia stock tends to march higher, thus incentivizing a long position.

Essentially, the stochastic rhythm is natively bullish. However, the DeepSeek impact represents a dynamic change to NVDA's normal fear-greed continuum. Whenever the stock loses between 10% to 20% in a one-week period, its upward bias remains intact. For example, four weeks following the aforementioned extreme-fear event, the chances of NVDA rising clocks in at 66.7%.

Further, the median return under the positive outcome stands at 16.26%. Empirically, then, investors have an incentive to play the odds. However, there is an important risk to consider.

It may be argued that from late March last year to now, NVDA stock is in the middle of charting a large-scale head-and-shoulders formation. If so, this pattern would have bearish implications for the tech juggernaut over the long run.

What adds to the anxiety is that Nvidia rival Advanced Micro Devices Inc. AMD also appears to be suffering from the same dynamic. Longer term, a cautious approach may be more prudent as the market fully digests DeepSeek's true implications.

Plotting an Aggressive Options Strategy

Because a potentially paradigm-altering headwind has caused notable technical damage against Nvida stock, a long position would be considered very aggressive. However, the odds over the next few weeks favor Nvidia since investors tend to buy the dips as demonstrated earlier.

With that in mind and assuming a starting point of $118.20, statistical trends under the bullish scenario suggest that by the end of the Feb. 21 session, Nvidia could land between $132.27 and $137.42. Speculators can give themselves a little bit of a cushion with the 108/130 bull call spread for the options chain expiring Feb. 21.

Under this multi-leg options strategy, a trader buys a call option (the $108 call in the above case) and simultaneously sells a call at a higher strike price (the $130 call). The idea is for the stock to rise to or above the short strike price, which would then trigger the maximum payout.

While bull spreads are capped-risk, capped-reward transactions, the underlying benefit is that the credit from the short call partially offsets the debit paid for the long call. Therefore, this transaction discounts a net long position.

Conspicuously, though, the 108/130 call features a pricey net debit of $1,090 at time of writing. In exchange for greater probabilistic risk (i.e. reducing the likelihood of success), a trader may enjoy lower positional risk (i.e. the net debit paid) with the 127/130 bull call spread. Currently, the debit required for this trade is only $95. However, the breakeven point rises to a lofty $127.95.

Now Read: