3 Ways to Create Income with Covered Calls on Nvidia

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Nvidia, one of the top-performing stocks in recent years, continues to draw attention from investors looking for profitable strategies. Covered calls, a conservative yet effective income-generating approach, can provide opportunities for making steady profits, even with market fluctuations. In this post, we'll explore three ways to use covered calls with Nvidia to generate income.

In-the-Money Covered Calls

This strategy focuses on selling calls that have a strike price below the current stock price, referred to as "in the money." It provides more security and protection because these options are more likely to expire in the money, offering a higher probability of success.

For example, if Nvidia is trading at $139, you could sell a 130-strike call option. The delta (a measure of probability) on this option is around 0.71, meaning there is a 71% chance the option will expire in the money. Selling this call allows you to collect a premium upfront, which can amount to about $4,420 for 1,000 shares over 28 days. This provides a 3% return, or a potential 41% annualized return. The downside risk is reduced because the premium acts as a cushion, allowing you to be protected up to $13.40 below the stock price.

Leaps: Buying Long-Term Options

If you're interested in a smaller initial investment, buying long-term options (also known as LEAPS) could be a great strategy. Instead of purchasing 1,000 shares of Nvidia at $139,000, you could buy 90 delta LEAPS (six-month expiration) for around $55 per share. This significantly reduces the capital required, allowing you to control Nvidia stock for only $55,000, rather than $139,000.

By selling covered calls on LEAPS, you can earn the same premium—$4,420 per month—without having to invest as much capital. This approach yields an 8% return per month, or a 96% annualized return. While slightly riskier due to the leverage involved, this strategy maximizes your potential gains.

Doubling Your Position with Leaps

For those with more capital, you can double your position using LEAPS while keeping your overall investment lower than buying Nvidia outright. Instead of buying 1,000 shares, you could buy enough LEAPS to control 2,000 shares for $110,000. You would then sell covered calls on these 2,000 shares, potentially earning $8,840 per month. This method increases your income potential while keeping your initial outlay more manageable than purchasing 2,000 shares directly.

Life-Improving Tips

- Focus on Consistency: Covered calls provide a steady income stream. Aim for small, consistent returns (2–4% per month) rather than trying to "hit it out of the park" with risky trades.

- Know Your Risk: Even though covered calls are considered conservative, there are risks, such as market downturns or the stock falling below your strike price. Always have a clear trading plan.

- Educate Yourself: Understanding how options work is crucial to successfully using covered calls. Resources like options trading videos, broker guides, and mentorship programs can help.

FAQs

Q: What happens if Nvidia's stock price drops significantly?

A: If Nvidia drops below your strike price, you still keep the premium from the covered call, which provides some cushion. However, if the stock falls sharply, your position could still lose value.

Q: What is delta, and why is it important in this strategy?

A: Delta represents the probability that the option will expire in the money. A higher delta indicates a higher chance of success. For example, a delta of 0.71 means a 71% chance that the option will expire in the money.

Q: How can I get started with covered calls if I don’t have $139,000 to invest in Nvidia?

A: You can use LEAPS instead of buying stock outright, which allows you to control Nvidia shares for a fraction of the cost. This significantly reduces the capital required while still enabling you to generate income.

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Conclusion

Covered calls offer a flexible, conservative way to generate consistent income, whether you have a large or small portfolio. Nvidia’s strong stock performance makes it a great candidate for this strategy, but always remember to manage risk, stay informed, and have a solid trading plan in place. By following the strategies outlined above, you can begin earning steady returns and create a more secure financial future.

3 Ways to Create Income with Covered Calls on Nvidia

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