options trading / backtesting / stock research / risk management
Should You Buy Puts After NVIDIA Drops? I Tested 172 Chip Stock Crashes
NVIDIA's CEO f*cked a Chinese spy, the stock fell over 4% pre-market, and I hold over $7,000 in NVIDIA calls. A lot of people buy puts after news like this, so I tested it on 172 drops across 13 chip stocks, including NVIDIA, AMD, Intel, Broadcom and Qualcomm, with options data covering 2022-2026.
Across the 13 stocks, calls bought after a drop were down about $1,500 a day later and $870 after a month, then up about $2,490 at six months (medians). A $2,000 put hedge lost money, and on NVIDIA the puts paid off once in 19 drops. Holding 20% out-of-the-money puts to expiration lost 73% on average. Selling them at a 20% gain made money 59% of the time and still lost about $230 on average. Every exit rule I tried averaged below zero. My options data only goes back four years, so a longer crash is outside what this tested. This is not financial advice.
Transcript
0:00NVIDIA's CEO f*cked a Chinese spy and now his stock is down over 4% pre-market.
0:06I have over $7,000 in NVIDIA calls, so here's what I plan to do next.
0:11One thing that people tend to do after bad news like this is that they buy puts.
0:17So I tested this explicitly on NVIDIA's worst drops in the past 4 years and also 10 other days
0:25when it fell 4% like this. But I didn't just stop at NVIDIA, I also tested similar
0:31chip stocks like it. Like AMD, Intel, Broadcom, Qualcomm, and other similar chip stocks.
0:38I analyzed 172 drops in total. I tested 3 things explicitly.
0:44Number 1, I tested a portfolio at $7,000 of 6 month calls.
0:48Number 2, I tested another portfolio at $7,000 of calls.
0:53But I tested buying $2,000 of puts right afterwards.
0:57And then number 3, I tested just buying the puts and having no calls at all.
1:03Here's what I found. The first month hurts a lot.
1:07Across all 13 chip stocks, one day after the drop, the calls were down $1,500.
1:14If I wait one week, the loss steepens to $1,670.
1:21And then at one month, we get a little bit of relief at a loss of only $870.
1:28But then something magical happens.
1:30If you just held and held and held across 6 months, those calls are up $2,490 since before
1:42the drop.
1:43If I look at Nvidia stock alone, it's up almost $3,000 if we look at days just like this.
1:51And $8,000 if we look at its worst crashes.
1:56Now, how did the puts do? Did the puts help us earn some money?
2:00And the answer is not even a little bit.
2:03My $2,000 hedge lost $1,000 to $1,800 depending on how deep out the money the puts were.
2:13On Nvidia, buying puts on days like this paid off one time in the past 19 drops.
2:20And if we look at deep out the money puts, the puts that look real cheap,
2:24they act even worse. They lost money in every single scenario.
2:29Buying puts to hedge against a loss like this has historically not worked in the past 4 years.
2:37Now, this analysis assumes you're going to be holding the puts until expiration.
2:42But in real life, you probably wouldn't do that.
2:45You'll probably sell at some point.
2:47So I decided to test this too.
2:49And what I found was the best results happen if you sold the puts at 20% gain.
2:55If you bought out the money puts around 20% out the money and sold at the 20% gain,
3:01you actually made money 57% of the time.
3:06But it didn't work all the time.
3:08And when it didn't work, the losses were even bigger.
3:13And you can try different variations.
3:15You can try selling some puts and then buying them back.
3:18Then selling some puts and buying it back.
3:19And no matter what experiment I actually tried, buying puts just wasn't worth it.
3:27Now, this analysis is a little limited.
3:29It only looks at stocks in the past 4 years because that's just simply as far back my
3:35options data goes.
3:37So if this turns out to be a multi-month crash, then the analysis simply missed it.
3:44If it turns out to be something like the dot-com bubble bursting for Nvidia,
3:48then my analysis simply missed it.
3:51But based on the data, it shows that you should not be buying puts at the end of a
3:56drop like this.
3:57If anything, you might want to buy some calls.
4:03Welcome to part 2 where I answer the question you're really wondering,
4:06is now the time to buy?
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