The Downside Of “Diamond Hands”
Last week, I finally got around to watching Dumb Money, the movie about Keith “Roaring Kitty” Gill and the epic GameStop Corporation (NYSE:GME) pump of a few years ago.
It’s entertaining, and worth a watch, but the reason I mention it here is because it includes a cautionary tale about holding a stock indefinitely, with no thought to exiting it. The movie includes a handful of minor characters representing Redditt, Inc. (NYSE:RDDT) users who followed Keith Gill into GME, include one who’s a registered nurse. Whenever the movie introduces a character, it shows the character’s net worth on the screen and updates it later. When we meet the nurse, she has a net worth in the negative six figures (presumably, from school loans and other debt).
With GameStop shares peaking in 2021, a hospital colleague asks the nurse if she’s going to sell, and she says no, she has “diamond hands”. At the end of the movie, we see that her net worth is negative again.
Nvidia Isn’t GameStop
Of course, Nvidia Corporation (NASDAQ:NVDA) isn’t GameStop. It’s also not Dot-com era Cisco Systems, Inc. (NASDAQ:CSCO) either, as some have suggested.
Cisco in 2000 was a lot more expensive than Nvidia today. For example, it had a PEG ratio of 3.45 versus Nvidia’s today of 1.48.
— David Pinsen (@dpinsen) June 19, 2024
Yes, Nvidia is the “it stock” of today, as a picks & shovels play on AI, just like Cisco was the it stock of the late ’90s, as a picks & shovels play on the growth of the internet. But its valuation is nowhere near as inflated as Cisco’s was, if you look at their respective PEG ratios (a PEG of 1 could be considered a fair valuation).
What Life-Altering Stock Investments Have In Common
Occasionally you read about someone who bought a handful of shares in stock such as Microsoft Corporation (NASDAQ:MSFT) or Walmart, Inc. (NYSE:WMT) when the company went public and held those shares until today. What these people tend to have in common is an emotional connection to the company that goes beyond any rational analysis. For example, they worked for the company early on, or lived near its headquarters and knew people who did. I guess you could consider this an upside of “diamond hands”, but for every Microsoft and Walmart investor who did this, there are likely hundreds who did the same with a longtime loser like Xerox Holdings Corporation (NASDAQ:XRX).
That Probably Doesn’t Apply To You
Nvidia went public 25 years ago. Unless you bought it back then, you are probably not in the stock for emotional reasons like those early Walmart or Microsoft investors. So let’s look at this from a rational perspective.
When To Sell: Valuation Versus Price Movement
One way to decide when to sell is to use a valuation metric, like the PEG ratio we looked at above. A drawback of that, though, is that a stock can trade at an elevated valuation for years, and you can miss out on a lot of gains that way. The approach we use in my trading Substack is going by price movement. Here are specific examples from my own trading of Nvidia.
Trading Nvidia Shares
I bought Nvidia as part of my trading Substack’s core strategy, which is to buy equal dollar amounts of Portfolio Armor’s top ten names, put trailing stops of 15% to 20% on them, and then replace each one with a new top ten name after we get stopped out. Using this approach, I bought Nvidia in February of 2023 and exited last April, for a gain of 259% over about 13 months (Nvidia has appeared in our top ten on multiple occasions over the last 8 years).
- Nvidia (NVDA 0.00%↑). Bought at $230 on 2/24/2023; stopped out at $825.06 on 4/18/2024. Profit: 259%.
Trading Nvidia Options
One difference between stocks and options is that options expire, so there’s no place for diamond hands: if you don’t sell or exercise before expiration, your options will expire worthless. Most of the options trades we do in my trading Substack are spreads, where the maximum possible gain and loss are pre-defined, What I do in those cases is open a GTC order to exit at about 95% of the spread, and lower that price, if necessary, as the expiration date approaches. Here are a couple of examples of me doing this trading Nvidia options.
- Call spread on Nvidia (NVDA 6.15%↑). Entered at a net debit of $2.10 on 2/20/2024; exited at a net credit of $4.74 on 2/22/2024. Profit: 126%.
- Call spread on Nvidia (NVDA 0.00%↑). Entered at a net debit of $3 on 5/21/2024; exited at a net credit of $9.45 on 5/23/2024. Profit: 215%.
Those were both earnings trades. The spread between the strike prices on the first one was $5, and on the second one, $10. I placed the second trade after I started my current practice of aiming for ~200% gains on options spreads.
Currently, we have four open options trades on track for ~200% gains. If you’d like a heads up when we place the next one, feel free to subscribe to our trading Substack/occasional email list below.
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This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.