Name: This Is How You Can Profit From The Nvidia Stock Split
Uploaded: 2024-06-24T09:08:28.000Z
Duration: 9 min 31 s
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NVIDIA's upcoming split is one of the biggest we've seen in a while.

Stock splits can be one of the more confusing parts of trading, but they don't have to be.

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I'm Tom Preston, Chief Market Strategist at Tasty Live, and I'm going to cover that topic as well as a couple of trade ideas at the end of this video, so stick around for this week's cherry picks.

Mike Rickentine and Nick Bautista put out a really interesting cherry picks this week talking about NVIDIA's upcoming stock split.

It's going to split 10-for-1 on June 7th.

As they explain, if I have 100 shares of NVIDIA right now, and NVIDIA right now is about $1,000 a share, what's going to happen when that 10-for-1 split happens, the stock price of NVIDIA will be one-tenth of what it was, so it'll go from $1,000 to $100.

And you will get, instead of 100 shares, your 100 shares will turn into 1,000 shares.

The net effect on your P&L is theoretically zero.

You'll have the same risk exposure to NVIDIA that you always had.

In other words, the same dollar amount in your account in NVIDIA won't change.

And here's the important thing to realize about all stock splits and corporate actions in general, is they don't change the company's value.

So a company won't be allowed to do, say, a, well, we'll do a stock split and increase our market cap by 10%.

A stock split is really a non-economic chain, theoretically.

Why would they do this in the first place?

It's to make their stock more accessible.

If I want to buy 100 shares of a $10,000 or $1,000 stock, I need $5,000 of capital to invest in them.

If I make it a $100 stock, it's more accessible to more retail traders.

And if it attracts more retail investors, there's an argument that you can make that it's a bullish signal for NVIDIA.

That's a treaty decision that you have to make on your own.

But what happens is, if you do own options in NVIDIA, the strike prices will be one-tenth of their size, and you'll get 10 times the number of options.

They also point out the impact on the Greeks, like delta, gamma, things like that.

The important one to realize is that delta does not change.

Theta is going to decrease, mostly because the option prices are lower.

Again, option prices are linearly related to the stock price.

So the option prices will be one-tenth of their value, but you'll get 10 times the quantity.

So that's how you think about the NVIDIA stock split.

If I were trading NVIDIA right now, or if I were thinking about opening up a new position in NVIDIA, I might wait until the split just to make it easier, so I don't have to deal with any adjustments.

The big issue with NVIDIA, it is the major component of the SMH Semiconductor Index.

It's got NVIDIA in a TSM, Taiwan Semiconductor, Broadcom, Texas Improvements, Qualcomm, etc., etc.

But at 20.65% NVIDIA, it's one-fifth of the portfolio of SMH.

But one of the things that they've looked at is the semiconductor ETF has performed very well because of that.

And as NVIDIA has taken off, that you can see this lower chart right here, this blue line is NVIDIA compared to everything else.

Up here, SMH has been rallying along with it, mainly because it's composed of its portfolio is 20% NVIDIA compared to Q's, SPDR, etc., etc.

That looked relatively flat, even though they've been pretty strong.

One of the things that we might look at is a trade in SMH.

And we're going to take a look at that right now.

One of the things they point out, Mike and Nick point out, well, the NVIDIA split effect volatility in SMH.

Currently, NVIDIA accounts for over 22% of the weighting in the Semiconductor Index, Semiconductor ETF.

If the volatility contracts in NVIDIA with a little bit of sideways action in iron condor in SMH could work nicely short the 215, 235 put spread and the 260, 280 call spread.

Again, the first thing I look at is the IV rank to see its relative volatility.

I will click on the ask price of the 215 put.

So this creates a short put spread of the iron condor.

And by the 280, this is an iron condor. 20 points wide.

That's about a third of the width of the strikes, a little bit more.

Very low deltas, about two deltas of exposure.

Most importantly, here are the numbers that I look at.

That has a 68% probability of making half of its max profit, which is theoretically $734 at the max.

So about $350 or so, $360 is half of its profit.

It's that you have to be comfortable taking that risk.

But it generates $7.56 of positive theta per day.

These are numbers that I think make it a relatively attractive trade.

So this is something that I would consider.

If I wanted to take less risk, I would probably move these strikes down and turn it into a 10-point iron condor.

I just adjust the strikes up and down until I find what I'm looking for.

So the 220, 230 on the put side, $2.65, $2.75 only has $643 of risk.

Still collects about a third of the width of the strikes. 71% probability of making half its profit and generating $3.90 of positive theta.

Either one of these trades, I think, is an interesting possibility.

The next trade that they talk about is Intel.

Intel, another semiconductor company, has been drastically underperforming the other semiconductor stocks.

As a trader, that really doesn't bother me.

But to look at this stuff for a second, here is, and again, I'm not a big chart person, but here's NVIDIA surging.

As much as NVIDIA has been rallying, Intel has been dropping.

The other point with Intel is it only has a 13.4 IV rank.

That means debit spreads look more attractive.

Let's see what the guys are taking a look at here.

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This Is How You Can Profit From The Nvidia Stock Split

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