Semiconductor firm Nvidia Corporation (NVDA) will slide into the earnings confessional after the close of trading tomorrow. The company has weathered a slowdown in PC sales rather well by expanding into the mobile market. Furthermore, NVDA stock has enjoyed a solid rally since the middle of 2015, placing the shares in direct conflict with resistance in the $29-$30 region.
With the shares on the verge of overbought territory, beating investor expectations will be key for NVDA stock to move forward at this point.
For the third quarter, the consensus is looking for Nvidia earnings of 25 cents per share, down from 31 cents per share in the same quarter last year. Revenue, meanwhile, is seen dipping 3.5% to $1.18 billion.
That said, whispers within the brokerage bunch indicate that some analysts are expecting a third-quarter profit of 28 cents per share from Nvidia earnings. Should the company hit or exceed this target, NVDA stock traders should see some solid post-earnings gains.
Overall, the analyst community is reserved when it comes to NVDA stock. In fact, Thomson/First Call reports that 19 of the 31 analysts following the stock rate it a “hold” or worse, compared to 12 “buy” ratings.
What’s more, the 12-month consensus price-target of $24 represents a discount to NVDA’s current perch at $28.50. Upgrades or price-target increases could go a long way to bolstering NVDA’s stock price.
Short sellers are also jumping on the bearish bandwagon. During the most recent reporting period, the number of NVDA shares sold short rose by 26%, leaving roughly 43 million shorted shares. This accumulation represents a respectable 8.45% of NVDA’s total float, or shares available for public trading, and could provide plenty of fuel for a short-covering rally following a well received quarterly report.
Click to Enlarge Looking at NVDA’s options configuration, short sellers appear to be a bit nervous ahead of Nvidia earnings.
Typically, short sellers will buy short-term call options as a way to hedge their positions. Along those lines, NVDA’s November put-call open interest ratio of 0.73 hints at potential hedging activity. Furthermore, this ratio dives to 0.55 for the weekly November 6 series, implying more potential risk aversion from short sellers.
Overall, weekly Nov. 6 series options are pricing in a potential post-earnings move of about 7.2%. This places the upper bound at $30.55, while the lower bound lies at $26.45. A rally would send NVDA stock into multi-year high territory, potentially feeding a short-squeeze among short sellers. Meanwhile, a decline to $26.45 should meet up with support from NVDA’s 10-week moving average.
2 Trades for NVDA Stock
Call Spread: From a contrarian standpoint, negativity levied against a strong technically performing stock has the potential for a bullish resolution. In other words, if Nvidia earnings receive a warm welcome on Wall Street, an unwinding of bearish bets could bring in a wave of sideline money. As such, traders looking to bet on a post-earnings rally for NVDA stock might want to consider a November $29/$30 bull call spread. At last check, this spread was offered at 37 cents, or $37 per pair of contracts. Breakeven lies at $29.37, while a maximum profit of 63 cents, or $63 per pair of contracts, is possible if NVDA closes at or above $30 when November options expire.
Put Sell: On the other hand, if an outright bullish call on NVDA doesn’t fit your risk profile, then a weekly Nov. 6 series $25.50 put sell may be more in line with your expectations. At last check, this put was bid at 16 cents, or $16 per contract. If NVDA closes at or above $25.50 by the close on this Friday, traders entering this position will retain the premium received for opening the position. However, if NVDA trades below $25.50 ahead of expiration, then traders may be assigned 100 shares at a price of $25.50 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- 6 High-Yield MLPs Paying Out 6% to 16%
- 7 Small-Cap Stocks to Buy for Gigantic Growth
- 3 ETFs to Benefit From Monthly Dividend Stocks