How to Generate a 40% Annualized Return from Nvidia's Chaos
So it turns out that the business of building brains for machines is now worth $4 trillion — a valuation that makes a single company, Nvidia, larger than the entire economy of Japan.
Everyone is asking the same question: is this a generational company leading an industrial revolution, or a bubble of historic proportions destined to pop?
But IMHO this is a fool's question, because it's a binary bet on an unpredictable future.
So, in this analysis, I’m going to lay out the actual mechanics driving the mania.
But more importantly, I’m going to show you how to position yourself to get paid by the people who are stuck chasing the momentum.
Yet it all starts with understanding that the $4 trillion valuation isn't just about AI hype, it's a perfect storm of three powerful forces.
First,
you have monopoly power that extends beyond the hardware.
Nvidia’s true moat isn’t just its graphics processing units (GPUs). It’s CUDA, the software platform that developers use to program those chips. For over a decade, Nvidia has built an entire ecosystem around CUDA, creating a deep, sticky lock-in that makes switching to a competitor extraordinarily painful and expensive. This is a classic platform monopoly, and the market is rewarding it as such.
Second,
Nvidia’s customers are caught in a game-theory trap, a classic prisoner’s dilemma. The tech giants — Microsoft, Google, Meta, Amazon — are in an AI arms race. They must spend tens of billions on Nvidia’s hardware, not necessarily because they have a clear path to profitability, but because the risk of falling behind is corporate suicide. If your competitor has a smarter AI, you lose the future.
So they all spend, driving Nvidia’s revenues to the stratosphere, even if the collective return on that capital is, for now, deeply negative.
They are forced to buy, regardless of price.
Third,
this creates a powerful reflexivity loop. The term was coined by George Soros. The rising stock price itself improves the company's fundamentals. A $4 trillion market cap allows Nvidia to attract the best engineering talent on the planet, fund massive R&D without blinking, and use its stock as a currency to acquire any potential threat.
The narrative fuels the fundamentals, which in turn reinforces the narrative.
Understanding this anatomy is crucial.
Because we are not looking at a simple story of a hot stock.
We are looking at a complex system of interlocking forces: a software monopoly, a customer base trapped by game theory, and a self-reinforcing market narrative.
But a system this perfect is, by definition, brittle
Every strength contains the seed of its own destruction.
This is where history provides a map of how such systems can fail.
The obvious parallel everyone mentions is Cisco Systems in 2000.
At the time, it was the undisputed king of the internet's plumbing.
The narrative was identical: as long as the internet grew, Cisco would grow. It seemed irrefutable. The company was minting money.
At its peak in March 2000, it became the most valuable company in the world, worth over $500 billion.
The financial press assured us this was a new paradigm.
We know how that story ended.
If you had bought Cisco at its peak, you would still be underwater nearly 25 years later. A quarter-century of dead money.
What happened?
It wasn't that the internet stopped growing. It was that the customers went broke. The dot-com bubble burst, the flood of venture capital dried up, and Cisco's order book evaporated overnight.
The failure was not in the company or the technology, but in the economic foundation of its customers.
Now, look at Nvidia.
The risk isn't that AI will disappear.
The risk is that the "profitability mirage" of its customers will.
At some point, the shareholders of Microsoft and Google will tire of the multi-billion-dollar AI science projects and demand to see a return. The moment that happens, the capital expenditure party ends. That is the ghost in this machine.
The history of technology is the history of unbundling monopolies.
The very customers fueling Nvidia's rise are also its greatest long-term threat. Google has its TPUs. Amazon has Trainium. Microsoft is developing its own silicon.
They are spending billions with Nvidia today, partly to buy themselves time to develop the very technology that will free them from Nvidia's grasp tomorrow.
OK, so how can we monetize the paradox?
A) Buying the stock is a bet that the narrative of infinite growth continues unchecked.
B) Shorting it is a bet that you can precisely time its collapse.
Both are sucker's games.
The logical response is to position yourself to profit from the tension itself.
The enormous disagreement about Nvidia's future has created a tangible asset: its volatility.
Option premiums on the stock are incredibly rich because of this uncertainty. Our job is not to resolve the uncertainty, but to sell it to others.
Ok, so how does this core risk — the potential for a sudden stop in customer spending — inform our approach?
It means we must abandon the hope of timing the peak.
Instead, we must define our entry points based not on momentum, but on levels that would signal a fundamental break in the current narrative.
We are looking for prices that reflect fear, not greed.
This dictates two very different approaches:
1. The Income Engine:
This strategy is for those whose primary goal is maximum cash flow.
You sell short-dated, at-the-money puts to "rent" your capital to momentum traders at an exorbitant rate. You are not trying to own the stock. You are simply harvesting the massive premiums created by the weekly churn of fear and greed.
If assigned, you immediately sell calls against the shares to get them called away, treating the stock as nothing more than a temporary vehicle for premium extraction. It is an active strategy that profits directly from the heart of the mania.
2. The Strategic Ambush:
This is for the value-conscious investor who would happily own a world-class company, but only at a rational price.
You sell longer-dated, significantly out-of-the-money puts. For instance, with the stock at $170, you might sell a 60-day put at a $130 strike.
Your primary goal is not the premium; your primary goal is to get paid while you wait for a market panic to deliver the asset to you at a price you determined was fair.
Why $130?
The $130 strike represents a confluence of factors.
First, it’s a roughly 25% correction from the current price — a decline that has historically been significant enough to shake out weak hands and signal a shift from greed to fear.
Second, it aligns with the major breakout support level from the previous fiscal quarter. If the stock were to fall to this level, it would be re-testing the very price that previously acted as a ceiling.
We are placing our buy order at the precise point where the market's previous optimism would turn into panicked selling to get paid to wait for their capitulation.
How I'm Playing This
So, which path do I favor?
For my own core capital, the Strategic Ambush is the only logical choice.
In my stage of life, capital preservation is paramount, and the wider margin of safety is worth the lower immediate yield.
However, I do maintain a small, separate allocation for more aggressive income generation.
For that sleeve of my portfolio, deploying the Income Engine strategy on a weekly basis is a compelling way to capitalize on the market's noise.
These are the trades you see from me every week — the Thursday puts and the Sunday covered calls.
The key is knowing which game you’re playing and with which capital before you place your bet.
Let the speculators bet on whether this revolution will succeed or fail.
We will be focused on something far more profitable: monetizing the debate itself.
Thank you for tuning in today and supporting my work!
Mike Thornton, Ph.D.
Good analysis on Nvidia. I mostly agree with it. I am wondering if the PUT strike should be determined based on implied volatility, say 1 or 1.5 (more conservative) std dev below market? Also, the current premium for 130P in Aug 15 or 29 expiry is rather low, so perhaps wait for the stock price to adjust down?