When I last checked in on Nvidia Corporation (NASDAQ:NVDA), shares were bumping up against technical resistance in the $110 region. I was concerned that NVDA stock was in for a bit of short-term weakness due to broad market factors and underappreciation from the brokerage community.
As it turns out, I was right on the money.
Following a minor downgrade from Pacific Crest “underweight” from “sector weight,” Nvidia stock retreated sharply and is now perched on support in the $100 region. The drop shouldn’t be unexpected for Nvidia shareholders, as many speculative investors are looking to take profits following NVDA’s blockbuster rally in 2016.
Yes, there are still more than a few hangers-on from that rally, and gyrations in the broad market and blips from the brokerage community are sure to spark rounds of panic selling.
But Nvidia’s long-term outlook remains solidly bullish, and if you are a buy-and-hold trader, my recommendations from March 22 still stand.
If you are more of a speculative trader, however, then the recent pullback in Nvidia stock represents a short-term bullish trading opportunity.
Charts and Sentiment
Technically speaking, NVDA shares have bounced between support at $100 and resistance in the $110 and $120 region since the start of 2017. The shares are currently trading near the bottom edge of this range, and appear ready to head higher once again.
What’s more, NVDA stock is on the verge of short-term oversold territory, increasing the likelihood that technical buyers could move in and support the shares.
Sentiment, meanwhile, has shifted a bit since late March. Thomson/First Call now reports that 19 of the 35 analysts following NVDA stock rate it a “buy” or better, down slightly over the past couple of weeks. The consensus 12-month price target now rests at $113.72 and represents a 12.8% premium to yesterday’s close. All in all, there is still room for potential upgrades or price target increases that could emerge from Nvidia’s growing presence in the automotive and internet of things operations.
Options traders, meanwhile, have grown more cautious, which should be a good thing for NVDA as it means we are far from disconcerting bullish euphoria on the shares. Currently, the April/May put/call open interest ratio arrives at 0.97, up from the equivalent March put/call OI ratio of 0.8 taken a few weeks ago.
Zeroing in on May implieds, we find that options traders are pricing in a potential move of about 11% for NVDA stock. This places the upper bound at about $111 and the lower bound at $89. While there may be a brief dip below $100, Nvidia should come roaring back in short order. Meanwhile, a break above $110 could provide a much larger upside move than options traders are expecting.
2 Trades for NVDA Stock
Call Spread: With Nvidia near oversold levels and the shares perched on key technical support, a rebound could be in the cards for the short-term. Traders looking to bet on a rally might consider a May $100/$110 bull call spread.
At last check, this spread was offered at $3.66, or $366 per pair of contracts. Breakeven lies at $103.66, while a maximum profit of $6.35, or $634 per pair of contracts, is possible if NVDA stock closes at or above $110 when May options expire.
Put Sell: If your risk tolerance isn’t quite that high, then a more neutral-to-bullish May $95 put sell may be more to your liking. At last check, the May $95 put was bid at 59 cents, or $59 per contract.
If Nvidia closes above $95 when May options expire, then you get to keep the premium received. But, if NVDA stock trades below $95 ahead of expiration, then traders may be assigned 100 shares at a price of $95 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
