Nvidia: An Income Investor's Dream

Nvidia gf4mx440 se (Photo credit: Wikipedia)

Click to enlargeChips go up, chips go down, chip sales rotate around and I am not talking Cape Code Potato Chips.

Intel (INTC) is good dividend producer much better than Nvidia (NVDA). INTC's yield is 3.22 and NVDA's yield is only .38%.

Nvidia is beating them on momentum and therefore on covered call income opportunity and this is good for income investors. Take a look at three calls I considered today.

38 DAYS AWAY - AUGUST 18 $180

This call does not capture the dividend which we expect to be $.14 with an expected ex-dividend date of 8/23/2017. Who needs the dividend when the call premium yields us a quick 2%. But wait it gets better.

66 DAYS AWAY - SEPTEMBER 15 $180

This call does capture the dividend but even more significant is the call premium yield of almost 3%. Total return is 1% better than the shorter duration call. Will going out further increase the return even more? Let's see.

101 DAYS AWAY - OCTOBER 20 $180

Now we are making some serious income with the call yield nearly 4%. However, even with that yield, and the captured dividend, the total return is again just 1% greater than the September expiration date and 2% greater than the August expiration date.

It is significant to note call volumes of these specific calls on Schwab.com are less than they were yesterday. This can make the premium variable. You never know until you put in the trade.

Which trade is the right one for you? My decision is based on the fact I could get really hurt if NVDA plunges. Intel is a much safer play. AMD sells chips that are competitive with NVDA's but they do not pay a dividend so that stock is out of the question for me.

I introduced each of these calls with the duration of time to expiration because that makes a difference. The difference in covered call terms is called the "time value of money." For me the difference is the risk of being under contract and not able to dump NVDA if it gets crushed.

I am taking the shortest duration, the August 18, 2017 $180. I find the total return of 18.90 percent compelling if NVDA is taken. If I still hold my shares after the call expires, I have the choice of selling it or writing another call. I will still be nervous the whole time but as an income investor, I really like this trade.

Disclosure: Long NVDA with calls

Comments

[MoneyMadam]

38 days is the expiration date of the option. At the time I sold this call it was the best return with the least risk; longer duration equals risk especially with momentum stocks. However, I usually sell calls on higher yielding stocks I call Dividend Machines, to capture the dividend, I pick an expiration date after the next ex-dividend date. M*

[billpeace65]

I'm a seller of surrogate covered call options for both NVDA and NFLX. The returns are substantial and the risk is minor IMO. However, you need to sell calls when the chart is overbought and sell as close to the magic 38 day window as possible.

[MoneyMadam]

billpeace65 is correct. M*

[kevn1111]

What is magical about 38. Also, is 38 days out from purchase date or is it 38 days till earnings release date? I have never heard anyone refer to it before and would enjoy understanding the thought process.

[smurf]

Don't do options, so at a .56% (that's right < 1%) dividend yield, think i'll pass on NVDA.

"An Income Investor's Dream" Hardly.

[MindsEye]

why do you post an opinion on articles about options strategies, if you don't use options?

[MoneyMadam]

smurf, if you don't do options, an income investor should not be in NVDA. M*

[kevn1111]

What I like in this area is that tech took a hit as it looked like some funds rotated out. There has been some recovery. I was not following NVDA, but do have some GOOGL and it has rebounded some as well as MU.

So if tech is good I think that mitigates some of the risk. Not market risk, but at least some sector risk. When I do sell calls, I look at similar durations, but took at the total trade and try and capture a good amount on the premium. Thus stock at $155. I would look to sell some $165 calls Sept 15 (66 days) at around 8.40. If it climbs above $165 I earn a total of 18.40 (10 on stock appreciation and 8.4 (5.4%) on premium for a total return of 11.87%. I would use the $180 price points if I wanted to hold on to the stock most likely and wanted to rinse and repeat. For me, it it exercised, I would look at valuation and possibly rebuy in again and do something similar. GL

[kevn1111]

Looks like that tech recovery or bounce back is continuing. Good thing I hopped on this yesterday. Did the Sept 15 165 calls. UP 4.5% on the stock and $8.60 on Premium or 5.5%, so +10% already. I do expect to be called. Trade is almost played out, though I could go buy some more and do it again. Only purchased 400 shrs and sold 4 covered calls.

Thanks Madam.

[MoneyMadam]

Well done kevn. M*