Just a few days ago, Wall Street media was gobbling up the hype that Nvidia Corporation’s (NASDAQ:NVDA) was going to dominate the world. Then, mere hours later, a stock sell-off ensued. As a result, NVDA fell almost 10% on Wednesday.
Keep in mind that even after a 10% dip, Nvidia stock remains in the stratosphere. It’s up more than 200% in just 12 months. On the way up, hot momentum stocks like this perpetually appear due for a pullback. But dips have been scarce and don’t last more than a few days. Then when we get one, most traders are hesitant to catch the falling knife.
So here we are with another short-term opportunity to buy NVDA stock at a 6% discount from last week. Since I am a conservative investor, I won’t risk $152 buying the shares outright. I will use options instead. Today’s trade could qualify as a speculative play, but only from the sense that the stock has already rallied so much in a short period of time.
Click to Enlarge Fundamentally NVDA is not cheap but given its growth rate and prospects it’s not bloated either. While a 50 price-to-earnings ratio is high, it’s nowhere near the roughly 200 P/E levels in Amazon.com, Inc (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) or even worse Salesforce.com, Inc (NYSE:CRM) which is over 400. Furthermore, NVDA pays a dividend and has better net profit margins than all of these and even Apple Inc. (NASDAQ:AAPL).
Wall Street doesn’t like surprises that are too far from expectations. Oddly enough for a stock this popular, analysts spread their ratings across three tiers with the largest being a hold. So the expectations may be in check.
NVDA management usually beats on earnings, so they are not likely to start disappoint this August. Micron Technology, Inc. (NASDAQ:MU) reports earnings today so it may give us a preview on how traders are likely to react to tech earnings in general.
Technically, NVDA stock range needs to hold $142 or risk retesting $135. If that happens, I’d worry about the fast profits that the stock gained in early May. Fast, easy candles often make for weak hands.
While my last trade delivered fast profits, today’s will be longer term, knowing I have profits in hand.
NVDA Stock Trade Idea
The Bet: Sell the Sep NVDA $115 put for $2 per contract, where I have an 90% theoretical chance of success. But if price falls below my strike I will suffer losses below $113. Compare this with having bought the stock here and suffered 25% in additional losses.
Not every trader is willing nor able to own shares of NVDA, and for those I would use spreads instead.
The Alternate Bet: Sell the NVDA $115/$110 credit put spread, where I have the same odds of success but without the large downside risk. This spread would still yield over 10%.
Investing is risky regardless of how big a buffer I build, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
