A $250,000 Bet on Nvidia Stock – Using Long Term Options For $2 Million in Leverage

I’m going to start this post by telling you not to do what I’m about to talk about. Obviously, you could lose a bunch of money. I can afford this particular gamble. I am not giving you financial advice – talk to a financial advisor if that’s what you’re looking for – but a lot of people have asked me what I’m investing in so I’m going to tell you what I’m doing and why I’m doing it.

I had a decent first half of 2017 and made a trading profit of about $150,000. I’m still bullish on parts of the market but not others, so I’ve been researching a good long-term play. Now anyone’s who’s been doing trading the past year (or just likes playing video games) has heard of the company NVIDIA.

In three years NVIDIA’s stock price has gone from $19 to around $150. Shares were up 224% in 2016 alone. It was the top performing stock in the S&P 500.

Usually, when a stock does that well it’s a red flag and you should be very careful about buying in. Stocks that shoot up that fast very often come crashing back down. There’s a very real possibilty that could happen to NVDA, which is currently priced at nearly FIFTY times its annual earnings.

But I think it’s going much higher.

Imagine, a few years from now, you’re playing your Nintendo Switch with virtual reality while being driven to work in your driverless electric car only to find out when you get there that your job at a company that uses giant datacenters has been automated and you’ve been replaced by artificial intelligence.

You’ll have NVIDIA to thank for all of it. All of the big technological changes that are going to reshape the world over the next decade will be powered by NVIDIA.

Gaming

NVIDIA’s core business is gaming. It manufactures graphics processing units, or GPUs, for computers. The chip that powers most of the work done on a normal computer is called the CPU, but these chips don’t work very well when it comes to the kinds of computations needed to display graphics for modern games. Computers built for gaming need a separate graphics card, and most gaming computers are built with chips from NVIDIA.

It’s not just PCs. Gaming consoles use GPUs too. The nintendo switch, which is powered by NVIDIA’s hardware, it projected to sell as many as 110 million units.

Globally, gaming is a big growth segment. Esports has been growing at 40 to 50 percent the past few years and will continue its strong growth for the foreseeable future. NVIDIA’s hardware also makes it perfectly positioned for the rise in Virtual Reality gaming. Virtual reality systems will require a lot of graphics processing power, so they will rely heavily on GPU.

But gaming alone doesn’t explain the massive rise in share price for NVIDIA.

Cryptocurrencies, i.e. Bitcoin

You’ve probably heard of Bitcoin, but there are tons of cryptocurrencies out there and new ones are being added every month.

Many of these other crytocurrencies are “mined” using GPUs. If you don’t know what cyrpto mining is – well Long story short, the original idea of cryptocurrencies was that you contributed some of your computer’s processing power to the network and in return you were rewarded with a chance to create coins. It didn’t take long for people to figure out that GPUs were much better than CPUs at mining currency. With the recent spikes in value for cryptocurrencies, miners are buying any GPUs they can get their hands on – driving up prices and creating hardware shortages. AMD and NVIDIA have made a lot of money selling their core products to these miners, and have even come out with graphics cards tailored specifically to currency mining.

Instead of trying to pick which cryptocurrency to invest in, I think it’s a better idea to invest in the hardware that powers them so I can profit no matter who wins. Cryptocurrencies are definitely a plus for NVIDIA, but it’s actually the smallest reason why I’m betting on them.

Data centers

Google, Amazon, Facebook and every company that relies on big data are constantly expanding their data centers.

Tracking your every move requires a LOT of processing power.

The datacenter market is exploding. Again, NVIDIA’s GPUs give it an advantage here. Their data center revenue tripled in just a year and continues to grow.

Driveless cars

NVIDIA’s GPUs power the entertainment modules in high end cars, but they could eventually be in every car you buy. Every Tesla car sold today already contains an NVIDIA GPU,  and NVIDIA has deals with other car companies like Volvo and Toyota to develop self-driving technology. It’s another huge market and yet another space where NVIDIA has a substantial lead.

Artificial Intelligence

My biggest interest in NVIDIA is their work in the area of artificial intelligence. They were one of the first companies to see the potential in AI, and here again GPUs are an essential tool for the emerging industry. Many companies now use artificial intelligence, but before AI can be deployed it has to be trained, and many companies are relying on NVIDIA’s solutions to train their AI.

NVDA is positioned to be the backbone of the major new tech of the next decade. These are going to be huge markets, and NVIDIA will likely be taking a large chunk of each one.

Some of these markets won’t hit their stride for several years, but I do expect the price of NVIDIA to rise the closer these futuristic technologies get to reality.

I went long on NVIDIA by buying up roughly a quarter million dollars in long term options, representing 12,000 shares. At today’s prices, that represents about 1.8 million worth of stock.

Screen Shot 2017-07-10 at 2.34.57 PM

Why am I buying options and not the stock itself?

To control 12,000 shares, I’d need to tie up $1.8 million indefinitely. Now suppose a competitor manages to beat NVDA in every segment I just mentioned. Maybe Crytpocurrencies crash. Maybe AMD takes over the gaming market, Google takes over the driverless car market, and some other large tech company takes over the AI market, sending the stock back to where it was just a year ago. I’d be out over a million dollars.

I’m very bullish on NViDiA, but if I’m wrong I’d rather keep my losses to a couple hundred thousand.

You can see from the pic I had to buy the options at various strike prices. Normally, an individual trader can’t move the stock price of a large company, but the volume on options so that expire so far out isn’t very heavy. It’s easy to buy up all the reasonably priced supply. I noticed my own trades driving up prices so I had to spread out the trades.

Risk Vs. Reward

Worst case, NVIDIA stock goes down, or even just doesn’t go up in the next 18 months. In that case I’m out the option premiums – $234,000. While that would definitely suck, a big chunk of that is profits I made from other trades this year so I’ll survive.

The rosiest scenario would involve NVIDIA repeating its performance from the past 18 months, which would mean a rise of 380%. In that case, my return would be over $6,000,000. Of course, past performance doesn’t tell you what a stock is going to do in the future, but I do believe NVIDIA stock has a lot of gas left in it.

I wanted to get this post up over the weekend, but maybe it’s good that I waited. I was actually in the red on this trade until it went up $38,000 today.

Remember what I said back at the top. Don’t try this at home. I’ll be posting updates so remember to subscribe.

 

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