Nvidia Corporation (NASDAQ:NVDA) has been on fire in 2017, but the road higher hasn’t been easy. NVDA stock has pushed past valuation concerns driven by fads in cryptocurrency mining and maintained its market dominance despite a very real threat from Advanced Micro Devices, Inc.’s (NASDAQ:AMD) newest GPU lineup.
The company has a chance to once again set investor fears aside this Thursday after the close, when Nvidia steps onto the earnings stage to release its fiscal second-quarter earnings report.
While there has been a growing groundswell of bullish support for NVDA stock, there are more than a few bears left on the sidelines that could help push the shares sharply higher on strong quarterly results.
I have a pair of trades to show you today that will help you position before the announcement. But first, let’s get some background on Nvidia’s current state.
Sentiment and Options
Diving into the numbers, the consensus is expecting Nvidia to post a 75% year-over-year spike in second-quarter profits to 70 cents per share, on revenue that is seen rising 37% YOY to $1.96 billion.
It seems some analysts are expecting a bigger quarterly gain — possibly based on increased sales to cryptocurrency miners — as EarningsWhispers.com places the whisper number at 76 cents per share.
That said, there is a general bullish mood within the brokerage community.
According to Thomson/First Call, 21 of the 38 analysts following NVDA stock rate it a “buy” or better. Meanwhile, the 12-month consensus price-target of $141.56 represents significant discount to Nvidia’s current perch near $167.21. Price-target increases could provide more fuel for the rally following a positive earnings report.
Outside the brokerage bunch, short sellers are are feeling a bit emboldened as Nvidia stock nears technical resistance at $170. During the most recent reporting period, the number of shares sold short rose by 6% to 17.3 million shares. As a result, roughly 3% of NVDA’s float remains sold short and could provide fuel for a moderate short-squeeze situation — especially if the shares break out above $170.
Click to Enlarge Turning to Nvidia’s options configuration, short sellers don’t appear worried about a continued rally given the lack of heavy call open interest. Currently, the Aug. 11 put/call open interest ratio rests at 0.88, with calls and puts in near parity.
Unsurprisingly, peak call OI rests at the $170 strike, while peak put OI lays at the $165 strike.
Overall, Aug 11 option implieds are pricing in a potential post earnings move of about 8.5% for NVDA stock. This places the upper bound at $181.78, while the lower bound lies at $153.22.
While a drop below $160 could be painful, shares should hold firmly above their 50-day moving average on any bad news. Meanwhile, a breakout to $180 would be a sign that Nvidia’s rally has entered yet another up leg.
2 Trades for NVDA Stock
Call Spread: Traders looking to join the bullish contingent might want to consider an Aug $175/$180 bull call spread.
At last check, this spread was offered at $1.52, or $152 per pair of contracts. Breakeven lies at $176.52, while a maximum profit of $3.48, or $348 per pair of contracts, is possible if NVDA stock closes at or above $65 when August options expire.
Put Sell: On the other hand, those traders worried about a neutral or poor reaction to this Thursday’s earnings might consider an Aug 11 $150 put sell.
At last check, this put was bid at $1.50, or $150 per contract. If Nvidia closes at or above $150 by the close on this Friday, traders entering this position will retain the premium received for opening the position. However, if NVDA stock trades below $150 ahead of expiration, then traders may be assigned 100 shares at a price of $150 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
