Nvidia, the $2.3 trillion chipmaker, has been a key player in driving the performance of U.S. equities, particularly in the semiconductor sector. With a significant weighting in the popular VanEck Semiconductor ETF (SMH), Nvidia’s performance has a direct impact on the overall market trends. The company’s focus on artificial intelligence has propelled its stock by over 500% since January 2023, marking a remarkable achievement in the industry.
One concerning trend surrounding Nvidia is the concept of “over-ownership,” where the stock is held by a large number of investors across various ETFs. As of February 2024, more than 500 different ETFs have exposure to Nvidia, with semiconductor and AI-themed ETFs holding the highest allocation percentages. While this widespread ownership has contributed to Nvidia’s rapid ascent, it also poses a risk of amplifying potential downturns in the stock.
Given the uncertainties surrounding Nvidia’s earnings release, it may be prudent for investors to consider hedging their exposure to the stock. One effective strategy is to utilize a put spread on the VanEck Semiconductor ETF (SMH), which allows investors to protect their positions without selling the underlying stock. By purchasing a put option at a certain strike price and simultaneously selling another put option at a lower strike price, investors can define their risk and potential profits in the event of a market downturn.
The Bearish Semi Trade
An example of a put spread strategy involves buying the SMH 6/28/24 $230 Put for $6.75 and selling the SMH 6/28/24 $210 Put for $1.65, resulting in a debit spread cost of $5.10 per spread. If the SMH trades below $210 before the expiration date, investors stand to profit from the difference in the strike prices, minus the premium paid for the options. This approach offers a risk/reward ratio of roughly three-to-one, providing a level of protection against potential market volatility.
In light of Nvidia’s upcoming earnings release and the prevailing market uncertainties, implementing a hedging strategy such as a put spread on the VanEck Semiconductor ETF (SMH) may offer investors a layer of protection against downside risks. By carefully managing their exposure to high-growth stocks like Nvidia, investors can navigate the market dynamics more effectively and enhance their overall portfolio performance. As always, it is important for investors to consult with financial advisors and consider their individual circumstances before making any investment decisions.