Momentum rockstar Nvidia Corporation (NASDAQ:NVDA) is flying high once more. Shareholders basking in the ever-growing profits can thank the chipmaker’s latest earnings announcement, which lit a fire under shares. NVDA stock is up 33% in the past week alone.
Not bad for a stock that had otherwise gone nowhere year-to-date.
So what’s the play here? Is it high time to climb aboard this rocketship? Or, with NVDA seemingly skirting the stratosphere, is it better to bet with gravity?
I suspect it’s the latter, and here’s why.
For one, reports are surfacing that Intel Corporation (NASDAQ:INTC) has reportedly let a GPU licensing deal with Nvidia expire in March, and the company is signing a new agreement with Advanced Micro Devices, Inc. (NASDAQ:AMD). While a deal has not been confirmed, and while NVDA stock isn’t reacting much to the news, AMD certainly is, up more than 7% so far in Tuesday’s trade.
Also, Nvidia has become extremely overbought suggesting its upward thrust could cool over the coming days. While overstretched stocks can certainly continue stretching, the odds favor at least a mild pause before the uptrend continues. For confirmation of its overbought status, check out the Stochastics indicator shown in the lower panel of the accompanying chart.
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Even if NVDA stock does keep clawing its way higher, its trajectory should moderate. The torrid pace it’s set so far is simply unsustainable. And as long as the stock’s ascent slows the suggested trade below should still pay out.
Lastly, the risk-reward for initiating new bullish plays at these lofty levels is simply unfavorable. If you’re a Nvidia fanboy looking for a piece of the upside action, pray for a pullback to provide a better entry point.
NVDA Stock: A Tempting Top-Calling Play
If you’re willing to fade Nvidia up here, consider selling a Jun $150/$155 bear call spread for 55 cents or better. You will capture the maximum gain of 55 cents if the stock sits below $150 at expiration. If the stock rises above $155 by expiration, you could potentially forfeit the max loss of $4.45.
To minimize the damage, I suggest exiting if NVDA stock pops above the short strike of $150.
In timing your entry, try waiting for a break below a prior day’s low to signal the stock has finally encountered resistance and is pivoting lower.
By using an out-of-the-money call spread to bet against the stock, we are creating a wide profit range that will deliver rewards even if Nvidia rises a bit further over the coming month.
As of this writing, Tyler Craig owned bearish option positions in NVDA.
