I was asked about selling covered calls on Nvidia (NVDA) , which just hit all-time highs and an eye-watering $3.765 trillion market capitalization. Selling covered calls is an investment strategy that maintains some upside exposure while generating income from selling option premiums. When contemplating the sale of covered calls, an investor must answer two key questions: Is one’s thesis regarding the anticipated price behavior neutral to mildly bullish, which is generally the ideal setup for covered call selling? If it is, what call provides a suitable balance of risk and reward? I’ll try to address the second, more general question regarding covered calls with ideas relevant to selling covered calls first, before delving into the specifics of Nvidia. Based on industry best practices, NVDA’s characteristics, and your objectives, the following delta and tenor are recommended: Choosing a strike One way to identify a suitable strike is by using an options delta. A call option’s delta can be used as a market-implied approximation of the probability that the stock will be higher than the strike price as of the option’s expiration date, thus expiring “in-the-money.” Peak profits for a covered call are achieved if the underlying stock appreciates up to, but not through, the strike of the call that is sold. The investor thus benefits from all the capital appreciation in the underlying stock, while retaining the premium from the call that is sold without sacrificing any gains or selling the underlying shares. Using this approach to estimate the likelihood, an out-of-the-money 25 delta call has a 25% probability of expiring “in the money” and therefore a 75% probability of expiring out of the money, or worthless. Choosing an option expiration or ‘tenor’ The ideal expiration, or “tenor,” will capture relatively high time decay, or “theta,” while maintaining some time to effectively manage a position while capturing or avoiding potential catalysts that the investor believes could help (or hurt) the position. Empirical studies across a broad array of underlying factors identified expirations of ~30-45 days as offering a suitable balance of risk, reward, decay and manageability. These are the Nvidia options that best align with our criteria: July 25 165 calls, 6.9% OTM. 27 delta, 30 days to expiration $2.45 ~19% annualized July 25 167.50 calls, 8.5% OTM 23 delta, 30 days to expiration $1.85 ~15% annualized Aug. 1 167.5 calls, 8.5% OTM 27 delta, 37 days to expiration, $2.70 ~17% annualized Aug. 1 170 calls, 10.2% OTM 22 delta, 37 days to expiration $2.10 or ~13% annualized yield Nvidia specific considerations Volatility : NVDA’s IV is elevated due to its AI-driven rally and market leadership. This increases premiums but also the risk of sharp price moves, including those through the strike of a covered call — which is generally not a desirable outcome. The 22-27 delta strikes in the examples above mitigate this by selecting strikes slightly further out of the money (OTM). You’ll observe that the calls offering the lowest annualized yield, the Aug. 1 weekly 170 calls, also provide the most room for potential capital appreciation in the stock, at 10.2%, and the highest probability of expiring worthless, at 78%. This is not a coincidence. The trade-off for higher yield is a higher probability that one caps the upside due to capital appreciation. Earnings risk : NVDA’s next earnings are due late August. A 30–45-day tenor expiring in mid-to-late July helps avoid earnings volatility, thereby reducing the risk of a post-earnings price drop. Market correlation : NVDA’s beta (~1.5–2.0) indicates that it tends to move more than the S & P 500. If SPY encounters resistance at $613, NVDA could pull back or consolidate, making OTM calls less likely to be exercised. Recent Performance : NVDA’s 1-month gain (+14.2%) and 1-year gain (+24.8% from $124.65 in June 2024) indicate strong momentum, but your view of other stocks catching up supports a conservative delta to avoid early assignment. My choice among these would be the August 1st 167.50s, which strike (pardon the pun) a reasonably conservative balance between yield and upside over the next six-plus weeks, and avoid earnings. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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