I asked ChatGPT how to profit from the impending AI stock crash. Oh, the irony

It takes a few months to really learn up on them really well.

With respect to risk & being new - The stock market does not know (or even really care) about your experience or your effective buy price. The risk profile of a trade is the same regardless of your experience. Where experience does matter is to avoid outright mistakes and to better stick to your plan. Some people sell at the first sign of red - when instead their strategy was to stay the course. Others do sell at that time because it was part of their strategy. Experience helps you to correctly enter trades with the profit curve you think they have, experience helps you define and stick to a strategy, and experience helps avoid various mistakes (for example, it's pretty easy to accidently buy instead of selling a credit spread). Last, experience helps you "fold". It's akin to poker in a way, it takes some experience to know that, yeah - you have a 5% chance to win a given pot, but you really need to instead cut your losses and just fold your position. People are generally so loss adverse that they do anything to wish for a stock to reach their break-even price again, and they keep buying more and more trying to average their position down - experience can help to cut the emotions of walking away with a (for example) 30% loss and simply getting on with your life.

With that said, the risk profile of all of those strategies (except for naked call selling) is less than that of long stock! Namely because the loss and profit are bounded. With stock at $122, you can lose $122. If you buy a put, you can lose at most the price of the put you bought (perhaps something like $50). Though, the chance of NVDA going to $0 is about zero.. The chance of an NVDA put going to zero are generally very good. The put is thus less risky from a max loss perspective, but more risky in terms of price volatility (specifically delta risk, the underlying could move a mere $10 and make that put worth 90% less, or perhaps multiples more)

For anyone, I suggest sticking to strategies where you can trade losses for time. Long stock are an example, if the underlying goes against you, and if the stock is fundamentally good, then you can "wait" for a price recovery. This is called bag holding, and it's not necessarily a bad thing. Not all trading strategies even have bag holding as an option, instead it is just a realized loss and you are down money no matter how right you were a day later. I talked to a number of people that kicked themselves for not buying PTON puts during its height - with experience you learn that to also get the timing right - is superman level luck. You have to be directionally correct, and correct in terms of timing damn near down to the day.

I agree with you that AI is a giant bubble. How hard that will pop and when, is anyones guess. Taking my advice from above, it's not something you can bet on because you won't be able to have time on your side if you're wrong about the timing. OTOH, you could just short NVDA (which does not have a time component), but.. I kinda think that is crazy sauce. NVDA is akin to the people that were selling the shovels to the gold miners during the gold rush - it's exactly where you want to be during a bubble. Other stock that I think are in a bubble, something like TSLA, which is currently priced as if the "robo-taxi" upgrade is just a few months out - it's just too challenging to make a good play. Which is to say, it's not that easy to actually make money on stocks going down. In 2021 I made a boat load selling call spreads on AMC, but selling spreads is actually just really risky. I was burned a few times, but certainly made huge returns there. Overall, the profit from selling a spread is simply low compared to the risk (it is nice that often you will make money selling spreads, but you need to do so 9 times out of 10 to stay even!).

You also need to understand "liquidity crunch" when it comes to derivatives. Most stocks you can instantly sell, some options you will never be able to sell because literally nobody is around to buy them (market makers are not at all obligated to facilitate all trades). If you're holding a "bad" option that is down by 70% - you might simply be unable to unload it and/or the market maker spread might force you to unload it at a 90% loss. That is a 20% loss just because it is an option, most options are like that, you're down by 20% due to spread, commissions (NVDA likely has excellent liquidity, so less of a problem there).

Bottom line, you're unlikely to make money in derivatives. The time it takes to manage derivatives is also significant. There is a year where I came out to a big loss, I would have been better off doing anything else other than spending 1 to 3 hours a day effectively burning money.

So, how do you make money on the AI bubble? Honestly, I don't think you do at this point. Long positions are generally just the best, buy something - check back in 5 or 10 years later. I bought $3000 of Apple at $65 in 1995, I bought $2000 of AMD at $1.60 back in about 2011.. In both cases I sold a few months later for very little gain, like 1%. The Apple example would be worth some several million today, and that AMD stake would have been worth a quarter million. If I had held all of those positions, I'd probably be retiring now.

Back in 2021, Jim Cramer was poo-poo'ing the Wall street bets crowd, asking them why they were buying crap like BBBY, AMC, WISH, GME - when they could instead buy NVDA or AAPL instead. Jim Cramer is kinda of an idiot, but buying NVDA at about $75 (or whatever it was then) back then was actually incredibly good advice (life changing advice really, that was quite an ideal time to make those plays).

I'll close in saying, getting rich quick in the market has about 10% odds. Which means, short term stuff is 90% likely going to lose you money. You are better off doing ANYTHING else than that. To do this day, when I spend $5k on something, I think - at least I"m getting something for this and it's not just some loss in the market that also required active time & attention on my part to do as well.

The 10% odds are indeed better than a casino, but short term money in the market is not sustainable and is likely to leave you broke. Make some investments and then check back in 5 to 15 years. That might sound like a long time, but it's actually not really.

I do like thinking about the greeks [1] when designing a position. First, let's clarify, we want to take advantage of price drop over a time period of approx 6 to 12 months. Let's say we're thinking a price drop of perhaps 30%. With these parameters, we want a strategy that has high delta & gamma values, but minimal theta & vega values. (any stock position has values for each of the greeks. For example, in the case of long or short stock, delta is 1, theta is 0, gamma is 0, and vega is 0)

Low theta - That is to say, we want a position that will not lose value as time goes by.

Low vega - if volatility drops, we do not want to lose money. Really if volatility changes at all - we do not want to lose money.

High Delta/Gamma - we do want the position to be responsive to price change, notably to decreases in price.

Long puts potentially have high theta, high delta, high vega. Long puts are not a good match because of high theta (and a drop in volatility hurts us, but if the price crashes, vega will help us. But, if the price crashes, then delta dominates, so we actually really don't want vega - delta is where we are making money, we are directional!)

Short stocks have delta of 1, gamma 0, theta 0, vega 0. That matches the greeks. Though, short stocks have both a maintenance requirement and an unlimited loss potential - the unlimited loss potential does not match our parameters.

Though, if we both sell and buy some puts (ie: a spread), then the overall position is the difference of the greeks. If we choose strikes that are close together, then theta & vega will be pretty close and would therefore nearly cancel. (EG: Theta of a put at $90 might be 0.35, theta at $85 might be 0.32, the overall theta of selling one and buying another is 0.03)

The difference in delta will also nearly cancel too. But, we are looking to take advantage of the difference in intrinsic value, when time has played out and there is no longer any extrinsic (AKA time) value on the contract left. Which is to say, this type of play only pays out (win or loss) near the time of expiry.

So, a narrow put spread has: low theta, low vega, low'ish delta. This is kinda the best you can do for the greeks perhaps. Very high delta positions are not very favorable unless we think the price change is happening starting from tomorrow (and in which case, we are also screwed by short term stuff, short-term, the market is totally and completely and utterly irrational). Very high delta positions are things like shorting, long puts, or buying very wide bear spreads. In all cases those are not great, either unlimited losses, or high exposure to theta (which is another way to say, they are dependent upon timing even more so than you being directionally correct)

Bottom line: a {"narrow" bear put spread} fits the parameters best (to the best of my knowledge).

The total loss/profit of buying a narrow bear put spread would be: (A) The max loss for any long position is the cost to enter that position. Anytime you "buy", that is a long position. In this case we are buying bear put spreads, max loss is therefore the full cost of the spreads. (B) The max profit is the price difference of the spreads minus the purchase price (for strikes that are 30% below current price, it's probably a very good return, perhaps 3x or better; that is a good return because it is extremely high risk - I would rather be the one selling that spread than the one buying them)

At this point though.. we are almost literally saying: "3 to 1 odds that NVDA will be at X price on date Y" << and that is gambling. I can't emphasize enough how that is gambling.

[1] https://www.investopedia.com/terms/g/greeks.asp

*Disclosure* I am currently long NVDA stock, a position of less than $5000.

Let me know if that works for you, it's my first time I've set up an RSS.