I'm doing it again

NVDA, the Street darling, has treated me very well lately. Over 2 months ago, I talked about its bearish technical setup and argued that it was a good short candidate. Sure enough, it did start to fall almost immediately. After I took the profit from its initial drop, I got another opportunity to short it but using a different strategy, a stepwise approach to set up a bearish put spread taking advantage of its dead cat bounce. You may see the details here and it was another profitable speculation to short it. We are now getting another perfect setup to short it again. And I'm using the same stepwise approach as well. You see, although it reported a great earning on Aug 11, it got crashed due to the euphoric expectation that could not be met. But the initial reaction was often overdone. I used the opportunity to sell naked puts for NVDA, expecting it to rebound soon. That's exactly what has happened and it has recovered most of the loss in the following 2 weeks. While my naked puts position has shown a great paper gain (over 70%), I don't think NVDA has been out of the woods yet. Actually my intention is to short it again. Technically it looks even more bearish to me than 2 months ago since its weekly chart starts to show a negative divergence. This often means its downside risk is not a short lived thing, but rather it may last for a few months. The nice bounce back in the past two weeks actually creates a bearish Head & Shoulder formation on the daily chart. And we are moving more into the bearish season as we speak. I think a big plummet for NVDA is in the card, probably in the range of 10-15% in the weeks ahead. So, instead of simply closing my naked puts for a nice profit, I leave it open but add another leg with long puts to create a bearish put spread. Given I'm already heavily profitable with the naked puts, this combo position will allow me to short NVDA with zero risk. Actually in the worst case if I'm wrong and NVDA just goes up from here, I can still walk away with some gain. However, I really aim for a much bigger gain from it. If I'm right and NVDA indeed plunges 10% or more, I may harvest 10 times more of a gain against the worst case scenario.


Don't get me wrong. NVDA is a great company with a great potential. I have no doubt it will go much higher in the years ahead but for now, it is simply too much ahead of itself. Whenever there is euphoria developed, the risk can increase exponentially. I think NVDA is probably facing such a dire short-term situation. At least it is not a good time to buy NVDA now. If you have already got great long term gain from it, taking some chips off the table is a good idea. Or add some protection to your long position at least!