Every stock that goes up must eventually come down (or at least correct). NVIDIA (NVDA) has been one of the most dominant stocks in the market, soaring to record highs thanks to its leadership in AI, gaming and data centers. However, it isn’t an exception to the rule!
If you are hoping to gain profit from NVDA’s potential pullbacks, shorting the stock could be the best strategy. But, steer clear of misconceptions. Short-selling is extremely risky, and it isn’t always profitable, especially in the case of volatile stocks like the NVDA. The key is to do it safely. Here’s how you can keep your risk under control;
Let’s Understand the Risks of Shorting NVDA
Before we get into the strategies, let’s discuss the risky nature of shorting NVDA. Unlike buying a stock where your maximum loss would be the amount invested, short-selling means you have much bigger fish to fry. You get exposed to unlimited losses as if the NVDA keeps climbing you could be forced to buy it back at a much higher price.
The NVDA is also a high-growth stock with a strong institutional backing. Even when it experiences short-term dips, long-term investors are frequently buying the dip which makes it difficult for short sellers to hold their positions profitably. This is why risk management should always come first when you are considering a short NVDA strategy.
How to Short NVDA Safely
Let’s start exploring a few strategies you can use;
1. Use Options Instead of Direct Shorts
One easy way to short NVDA safely is by using put options instead of directly shorting the stock. Buying put options helps you profit from a decline in NVDA’s stock price while limiting your overall potential losses to the amount you spent on the option premium.
Certain spreads such as bear put spreads can further reduce your risk. A bear put spread involves buying a put option at a certain strike price while simultaneously selling a put option at a lower strike price. This limits your potential profit but also caps your losses making it a much safer alternative to naked short-selling.
2. The Power of Inverse ETFs
A great way to short NVDA without adding excessive risk to your portfolio is by using inverse ETFs. These ETFs are designed to move in the opposite direction of the underlying stock or sector, allowing you to profit when NVDA declines without the risk of margin calls or unlimited losses.
For example, if you want to short NVDA you can consider inverse semiconductor ETFs that provide exposure to the sector as a whole. This strategy gets you to diversify your risk while still capitalizing on a potential downturn in NVDA’s official stock price.
3. Proportion of Portfolio and the Right Timing
Position sizing is essential. Never allocate too much of your portfolio to a single short position. Many traders make the mistake of going all-in on a short trade only to watch their accounts get wiped out. The best approach is to limit short exposure to a small percentage of your portfolio.
Moreover, shorting NVDA at the wrong time can prove disastrous. Instead of blindly shorting after a rally, wait for technical indicators such as overbought conditions, bearish divergence in momentum indicators, or fundamental catalysts that could signal weakness.
Proceed with Caution
Go ahead and dabble in shorting NVDA. However, keep in mind that combining technical and fundamental analysis can significantly improve your odds of success when shorting high-flying stocks like NVDA. For example, earnings reports, Federal Reserve decisions, or unexpected industry news can create selling pressure on NVDA, offering better shorting opportunities.
Whether you choose put options, inverse ETFs, or direct short-selling, always have a risk control plan in place. That’s the best way to succeed when shorting NVDA.
