Tuesday, July 11, 2017

Nvidia an Income Investor's dream

Nvidia gf4mx440 se
Nvidia gf4mx440 se (Photo credit: Wikipedia)
Chips go up, chips go down, chip sales rotate around and I am not talking Cape Cod  Potato Chips.

INTC is good dividend producer much better than 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