Nvidia Corporation (NASDAQ:NVDA) certainly had been one of the best performing stocks until recently, rallying nearly 80% from its third-quarter 2016 earnings on Nov. 10.
NVDA stock ran into trouble, however, following Q4 2017 earnings on Feb. 8, giving back nearly 50% of the recent gains before finding support.
Momentum has clearly waned, and I expect NVDA stock to remain range bound in front of first-quarter earnings on May 9.
What to Expect From NOK Stock
From a technical perspective, NVDA shares have established a definitive trading range. Support is at the $95 level with overhead resistance at $110 area. I look for Nvidia to bounce around these price points over the next few weeks, with the stock consolidating before earnings.
Click to Enlarge Momentum has definitely deteriorated in Nvidia as the current negative reading of -7.74 would show.
Previous negative momentum readings, however, have proven to be reliable short-term indicators that NVDA stock has bottomed. I would expect the $95 support level to hold over the coming weeks.
As mentioned earlier, Nvidia stock sold off sharply following the latest earnings report. This selloff was despite a significant beat on both per-share earnings ($1.13 versus 83 cents consensus) and revenues ($2.17 billion versus expectations of $2.11 billion).
Analysts have also recently sounded the alarm bells with several downgrades. Pacific Crest was the latest firm to weigh in, lowering the stock from “market weight” to “underweight.”
Most of the downgrades have focused on valuation as the biggest concern, Certainly NVDA sports a fairly lofty price-earnings multiple of nearly 40. The recent 22% drop in NVDA stock price along with the better than expected earnings have definitely tempered those valuation concerns, as price lessens and earnings expand.
So with upside momentum and faith broken but with valuations at a more reasonable levels, NVDA will likely chop around in front of earnings.
While it is difficult to profit using stock in a range bound market, the options market prides a defined risk solution to harvest some premium with a condor trade.
NVDA Stock Options
Buy the NVDA 5 May $95 puts and sell NVDA 5 May $93 puts; and buy the NVDA 5 May $115 calls and sell NVDA 5 May $110 calls. The total credit on this trade is 55 cents or better.
The maximum gain on the trade is $55 per spread with a maximum loss of $145 per spread. Return on risk is 38%.
The maximum gain will be realized if NVDA stock closes between the downside support of $95 and the upside resistance of $110 on May 5 expiration.
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.
