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Nvidia Preview: 2 Trades for NVDA Stock Before Earnings

Semiconductor specialist Nvidia Corporation (NASDAQ:NVDA) is to join the earnings parade after the close of trading tomorrow. Despite a slowdown in the company’s core PC market, where it sells some of the most popular graphics processor chips, Nvidia has managed to meet or beat Wall Street’s expectations in every quarter for the past four years.

Nvidia NVDA 185That’s no small feat.

For the first quarter, the consensus is targeting earnings of 26 cents per share from Nvidia, up 8.3% from the same quarter last year. Revenue is seen advancing 5.6% to $1.2 billion. Analysts believe that the main drag on NVDA first-quarter figures could be sluggish growth in the mobile market, where the company has had success with its Tegra processor lines.

That said, whispers within the brokerage bunch indicate that some analysts are expecting a first-quarter profit of 29 cents per share from NVDA stock. Should the company hit or exceed this target, NVDA stock traders should see some solid post-earnings gains.

Overall, the analyst community is somewhat reserved when it comes to NVDA stock. Thomson/First Call reports that 19 of the 30 analysts following the stock rate it a “hold” or worse, compared to just 11 “buy” ratings. Additionally, the 12-month consensus price-target of $23 represents a minor premium of only about 4.5% to yesterday’s close.

There is clearly room for potential upgrades or price-target increases, but Nvidia will need to show strong guidance in order to shake some of these bears loose.

Short sellers are also jumping on the bearish bandwagon. During the most recent reporting period, the number of NVDA shares sold short rose by roughly 5%, leaving roughly 55.2 million shorted shares. This accumulation represents a sizeable 10.5% of NVDA’s total float, or shares available for public trading, and could provide ample fuel for a short-covering rally.

Judging by NVDA’s options configuration, these shorts are no nervous about their positions at all. Typically, short sellers will buy short-term call options as a way to hedge their positions, but NVDA’s weekly May 8 series put/call open interest ratio of 0.85 reveals very little preference for calls ahead of the company’s quarterly report. What’s more, this reading turns downright bearish, arriving at 2.40 for total May open interest.

05-06-2015 NVDA
Click to Enlarge
 Overall, weekly May 8 series options are pricing in a potential post-earnings move of about 7%. This places the upper bound at $23.59, while the lower bound lies at $20.41. A rally would send NVDA stock past its April highs, and potentially feed a short-squeeze that could send the stock even higher. Meanwhile, a decline to $20 would have NVDA trading at its April lows, with potential support in the region as a backstop. A breach of $20 would be a bearish signal going forward.

2 Trades for NVDA Stock

Call Spread: Despite the negativity being levied against NVDA, the stock still has strong growth prospects in the mobile market. The stock’s recent rebound from heavy losses show ample resilience, and strong guidance tomorrow could be just the catalyst to send NVDA higher. As such, traders looking to bet on a post-earnings rally for NVDA stock might want to consider a May $22/$23.50 bull call spread.

At last check, this spread was offered at 62 cents, or $62 per pair of contracts. Breakeven lies at $22.62, while a maximum profit of 88 cents, or $88 per pair of contracts, is possible if NVDA closes at or above $23.50 when May options expire.

Put Sell: On the other hand, if an outright bullish call on NVDA doesn’t fit your risk profile, then a weekly May 8 series $20.50 put sell may be more in line with your expectations. At last check, this put was bid at 13 cents, or $13 per contract. If NVDA closes at or above $20.50 by the close on this Friday, traders entering this position will retain the premium received for opening the position. However, if NVDA trades below $20.50 ahead of expiration, then traders may be assigned 100 shares at a price of $20.50 per share for every contract sold.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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