The Other Stocks Forming This Week's 'Death Cross' Follow Microsoft

Volatility has returned to the market as the valuations of the "Magnificent 7" are finally being reassessed. This shift provides an opportunity to capitalize on the increased premiums investors are paying for downside protection. With this in mind, I am focusing on Nvidia (NVDA), the standout leader of the group, by using options to generate income and potentially build a long position.

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Nvidia, a dominant force in the artificial intelligence (AI) chip industry, has played a significant role in driving the performance of the Magnificent 7 over the past few years. The company's stock has surged by nearly 1,800% over the past five years, fueled by the explosive growth of the AI sector. However, as the market reevaluates the lofty valuations of these tech giants, Nvidia’s stock is now experiencing increased volatility, which presents an opportunity.

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Recently, Nvidia suffered its most significant post-earnings decline since August 2022. The stock fell approximately 9% during intraday trading, wiping out nearly $350 billion in market capitalization. To put that in perspective, the entire market value of Johnson & Johnson (JNJ) is equivalent to this single-day loss. Following this sharp decline, Nvidia's stock is now trading about 20% below its all-time high. This pullback suggests a potential post-earnings overreaction, making it an attractive time to express a bullish stance through options.

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Given these market conditions, I want to implement a put spread strategy on Nvidia. This approach allows me to generate income while limiting potential losses in case the stock faces further declines. A put spread involves selling a higher-strike put option while simultaneously buying a lower-strike put option. This strategy benefits from the passage of time and a stable or rising stock price while defining the maximum risk.

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Here is the specific trade I am executing:

1. Sell the $118 put option expiring on March 21, 2025, for $6.50
2. Buy the $110 put option expiring on March 21, 2025, for $3.50

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This put spread was initiated when Nvidia’s stock was trading around $118 per share. By selling the $118 put, I receive a premium of $6.50 per share, while purchasing the $110 put costs $3.50 per share. The net credit received from the trade is $3.00 per share, or $300 per contract, which represents the potential maximum profit if Nvidia remains above $118 at expiration.

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The rationale behind this trade is twofold. First, it allows me to generate immediate income from the premiums collected. Second, if Nvidia’s stock continues to decline and falls below $118, I am willing to establish a long position at that level. The risk is limited to the difference between the two strike prices, minus the net premium received. In this case, the maximum potential loss is $5.00 per share, or $500 per contract, which would occur if Nvidia drops to $110 or lower by the expiration date.

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This strategy aligns with my bullish outlook on Nvidia following the recent price correction. While the stock's sharp decline reflects some investor concerns, the broader growth potential of the AI market remains intact. Nvidia’s leading position in the AI chip industry and the ongoing demand for advanced computing solutions suggest the company’s long-term fundamentals remain strong.

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Moreover, the elevated premiums for downside protection indicate that investors are paying a higher price to hedge against further declines. This environment makes selling put spreads more attractive, as it allows me to collect larger premiums while maintaining defined risk.

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By using a put spread rather than selling a naked put, I am protecting myself from a more substantial decline in Nvidia’s stock price. This defined-risk structure is particularly important given the heightened volatility and the potential for further market-wide adjustments. If Nvidia stabilizes or rebounds, the spread will gradually decay in value, allowing me to capture the full premium and exit the trade profitably.

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Overall, the repricing of the Magnificent 7 has created an environment where volatility can be used to generate income. Nvidia’s recent post-earnings dip offers a compelling opportunity to establish a bullish position while managing risk. By selling a put spread, I can benefit from the increased option premiums while positioning myself to acquire shares at a discounted price if the stock experiences further weakness.

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As the market continues to adjust its view on the Magnificent 7, I remain focused on leveraging volatility to create income and maintain a disciplined approach to risk management. This trade on Nvidia reflects both my positive long-term outlook on the company and my willingness to embrace short-term volatility to capture opportunity.

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