After making an all-time high of $120.92 exactly a month ago, shares of former momentum darling Nvidia Corporation (NASDAQ:NVDA) have fallen nearly 20%. This follows an earnings report on Feb. 9 that saw NVDA handily beating estimates on both earnings and revenues, although providing tepid guidance.
Goldman Sachs has NVDA on the Conviction Buy list and reiterated their buy rating with a $130 price target. While $130 may be a stretch, I think that short term, the selling may be getting overdone in NVDA stock.
In my previous post on NVDA from Feb. 7, I recommended taking a bearish position in NVDA stock in front of earnings with the stock trading around the $118 level.
The basis for the bearish argument then was that NVDA stock price had gotten well ahead of itself on both a valuation and price perspective. Our own Dana Blankenhorn later echoed similar sentiments post-earnings.
Now that NVDA has fallen 20%, certainly some of the valuation concerns have been tempered simply owing to a much lower stock price.
Momentum stocks like Nvidia tend to move as much on technicals as on fundamentals, especially in the age of algorithmic trading. NVDA is trading right at critical intermediate support at the $95 level, an area it has held over the past two days.
NVDA stock is also getting oversold on a nine-day RSI basis with readings approaching 30. The previous time Nvidia was this oversold was February 2016 and proved to be a meaningful low in the share price.
The past two days have seen bullish reversal candlesticks in Nvidia stock. These hammer formations, with a long lower wick and a small upper body, indicate the sellers attempted to push down the stock lower initially only to have the buyers step in and rally the stock back to the highs of the day.
Many times this type of price action signals that the sellers may be getting exhausted at current levels. This reversal pattern is even more powerful after a sharp pullback like the one we have just seen in NVDA.
With an expectation of NVDA finding support at current levels, a bullish put spread strategy makes intuitive sense.
NVDA Stock Trade Idea
Buy NVDA April $85 puts and sell NVDA April $90 puts for a 90 cents net credit or better.
Maximum gain on the trade is $90 per spread with maximum risk of $410 per spread. Return on risk is 22%. The short $90 strike price provides a 7.85% downside cushion to the $97.67 closing price of NVDA.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
