If there's one company that's become the face of the artificial intelligence (AI) revolution, it's probably Nvidia (NVDA +0.64%). As a major developer of the high-end semiconductor chips that have gone into the AI buildout, it's seen its stock price rocket higher over the past few years.
Lately, however, momentum has fizzled. Over the past six months, the stock is up only 6%. Even after the company's recent Q4 earnings report, in which it beat earnings and revenue expectations and raised forward guidance, the stock fell by more than 5% the following trading day.
Given what we're seeing elsewhere in the market, specifically the rotation away from the tech sector, it may be time to rethink expectations around Nvidia. If this were a sign that most of the good news is already priced into the stock, there are ways to augment the performance of an investment in Nvidia in case things go south.
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Combining Nvidia with an option-income strategy
Writing options on stocks you already own can be a great way to add an income component to your investments. This involves selling a call or put option on a stock you own and collecting the premium as "income."
In an ideal scenario, the option contract will expire worthless, you keep the premium collected, and you continue holding on to your stock. On the flip side, if the stock price moves in-the-money (above the strike price for a call and below the strike price for a put), the contract is likely to be exercised, and you'll be forced to buy or sell at less advantageous prices (although you still get to keep the premium).
In essence, you're trading share price upside potential in exchange for a high yield. You're still exposed to downside risk, but the income generated could offset some of those losses.
A Nvidia option-income strategy in a single ETF
Building an option income strategy on your own can be complex and costly. But there are a number of ETFs out there that do the work for you. The YieldMaxDA Option Income Strategy ETF (NVDY +0.72%) combines long Nvidia exposure with an actively managed option income that can write either calls or puts. It regularly adjusts and re-establishes the overall strategy, so as an investor, all you need to do is own the fund.
NYSEMKT: NVDY
Key Data Points
If you feel that Nvidia stock will start heading lower, this ETF could be a good way to produce income that could offset some of those share price losses.
Currently, the fund quotes a distribution rate of 41.77% as of March 2 (which is calculated by taking the most recent distribution and annualizing it). One key advantage is that distributions are made weekly, which also helps generate a steady cash flow for investors.
Because the dynamics of option-income strategies are constantly changing and Nvidia stock is volatile, there's no guarantee the option-income strategy can offset share price losses. But it is a unique strategy that offers a different approach to owning Nvidia. In a downtrending market, it could become a valuable tool.
