Price action following a recent downgrade in Nvidia Corporation (NASDAQ:NVDA) is enough to make Goldman Sachs blush. But after a steep and swift decline over the past month that’s left NVDA 8% in the red despite today’s 2% bump, is it really time to buy NVDA stock?
Let’s take a look at what’s happening both off and on the NVDA chart and then present a limited-risk options strategy to match our view.
If you thought the venerable Goldman Sachs holds sway with investors, think again. Shares of NVDA are off 10% since broker Pacific Crest cut semiconductor outfit Nvidia to “underweight” from “sector weight” back on April 4.
Pacific Crest cited a saturated GPU market, lower Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch sales margins and a likely pause in the company’s data center business as reasons behind the downgrade in NVDA.
However, repeated bullish analyst notes on Nvidia from Goldman over the past couple months are net-net underwater and well-removed from a $130 price target in NVDA stock.
So, who’s right and who’s wrong? Only time is really going to tell, but I personally welcome the near-sighted focus on Pac Crest’s bearish Nvidia stock narrative by other investors.
The way I see the situation in Nvidia, the current about-face in one of 2016’s best-performing stocks is creating an opportunity, to pick up a company entrenched in some of the market’s strongest, secular growth areas, on the cheap and maybe a good deal cheaper.
NVDA Stock Daily Chart
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Over the past couple weeks, though, Nvidia stock has proceeded to get knocked back down and challenge its corrective lows. The evolving price action puts shares into a potentially bullish, double-bottom situation if NVDA is able to reverse higher.
If NVDA shares continue to move down in price, a lower-low variation of the double-bottom pattern could set up as low as the drawn in neckline near $91.50.
Below the neckline and Nvidia stock bears will have momentum in their favor down to $84 a share. A decline of that size works out to a corrective move of just over 30%. It also offers a test of the 200-day simple moving average and 38% retracement level from the February 2016 low.
So what if NVDA still isn’t finished correcting and fails to hold those supports above today’s pop? That’s potentially very bad news. Technically, Nvidia stock could be following through on a measured move from a head-and-shoulders pattern. Conservatively, a break of the neckline signals an eventual move in NVDA down near $68.
NVDA Bullish Spread Combo
For investors that are inclined to be bullish on NVDA, but appreciate the risk of a topping pattern and earnings on the horizon, I like the idea of combining a bullishly targeted long call butterfly and out-of-the-money put vertical spread.
Reviewing the Nvidia options board and with shares closing the past trading day at $95.49, a package of selling the May $85/$80 put spread and purchasing the May $100/$110/$120 call butterfly is priced for 75 cents or better. For 75 cents, the combination allows the trader to have an upside profit range from $100.75 to $119.25. The sweet spot at $110 allows for profits to max out at $9.25 if NVDA were to land on the strike at expiration.
Above $120, the trader would forfeit 75 cents at expiration. For bulls of course this represents a sacrifice. Our view is this is a reasonable allowance considering it matches the prior high in Nvidia and should take more than an earnings beat, to be cleared.
If NVDA fails to rally above $100 or declines in price, at expiration the trader is out 75 cents if the stock is between $85 and $100 a share. Below $85 and losses begin to accrue one-for-one with a decline in Nvidia shares. At $80 or lower, a loss of $5.75 would be realized.
In the event of this type of dramatic move, however, and a stock purchase price that’s never worse than $85.75, the trader may see this as a nice starting point for building a longer-term position.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
