Nvidia is a major player in the semiconductor industry, with a hefty 21% weighting in the VanEck Semiconductor ETF. The company has seen significant growth in the past year, driven by the increased demand for artificial intelligence technology. However, this success has led to “over-ownership” of Nvidia in the market, with over 500 different ETFs now holding shares of the company. This level of exposure can be concerning, as it has the potential to amplify both the upside and downside movements of Nvidia’s stock.
To mitigate the risks associated with Nvidia’s earnings release, investors can implement a hedge using options trading. One strategy is to utilize a put spread on the VanEck Semiconductor ETF (SMH), which provides exposure to a basket of semiconductor stocks including Nvidia. By buying a put spread, investors can protect their existing holdings in Nvidia without having to sell the stock itself. This strategy allows investors to define their risk and potential profit in the event of a market downturn.
An example of a put spread strategy would involve buying the SMH 6/28/24 $230 Put for $6.75 and selling the SMH 6/28/24 $210 Put for $1.65. This debit spread would cost the investor $5.10 per spread. If the SMH trades below $210 before June 28, the investor would profit from the $20 spread minus the $5.10 premium paid, resulting in a profit of $14.90 per spread. This strategy offers a three-to-one risk/reward ratio for investors looking to hedge against a potential downturn in the semiconductor sector.
While Nvidia’s earnings release may have a significant impact on the short-term direction of U.S. equities, investors can take steps to protect themselves from the potential risks of over-exposure to the stock. By implementing a hedging strategy such as a put spread on the VanEck Semiconductor ETF, investors can manage their risk and potential profit in the event of a market downturn. It is important for investors to carefully consider their own financial circumstances and seek advice from a financial advisor before making any investment decisions.