Nvidia Corporation (NASDAQ:NVDA) stock surged more than 200% in 2016, capped by a 16% rally in December. Needless to say, NVDA stock was due for a round of profit taking, if not a full-on correction.
Nvidia shares vaulted to $120 amid a low-volume Santa Claus rally, providing traders returning from the break with an irresistible opportunity to take some much-needed holiday profits.
The question now is, can NVDA stock extend its 2016 rally into the new year?
The company has a pair of opportunities within the next two months to further impress investors. The first arrives tonight, when Nvidia CEO and co-founder Jen-Hsun Huang will deliver the keynote speech at the 2017 CES in Las Vegas, upstaging rival Intel Corporation (NASDAQ:INTC), which has given the keynote in the past two years.
Huang is expected to “break news in some of the areas we’re focused on: artificial intelligence, self-driving cars, virtual reality and gaming.” VR has been a major driver for analyst upgrades and bullish research notes of late, as well as the company’s inside line on one of next year’s hottest gaming consoles: the Nintendo Switch.
Let’s take a look into Nvidia stock, and we’ll offer up a pair of trade ideas for the near future.
NVDA Sentiment and Charts
Overall sentiment toward NVDA stock has improved dramatically over the past month. In early December, 19 of 33 analysts following Nvidia stock rated it a “buy,” compared 21 “buys” out of 35 ratings currently. Additionally, the 12-month consensus price target has jumped from $85.02 on Dec. 7 to $92.56 at last check. That said, this target still represents a discount to NVDA stock’s Tuesday close at $102.01, hinting at more room for potential price-target increases.
Elsewhere, despite the surge in Nvidia shares, short sellers have increased their positions. During the most recent reporting period, the number of shares sold short rose 1% to 71.4 million, or 13.89% of NVDA’s total float — up from 13.35% in early December. If Nvidia stock finds support and resumes its former uptrend, we could see the weak hands shaken out in a short-squeeze play.
Click to Enlarge A look at Nvidia’s options configuration reveals that short sellers aren’t worried at all, which could exacerbate a short-covering rally if the stock moves higher. Currently, the January 2017 put/call open interest ratio rests at a lofty 1.50 amid heavy put buying.
With calls typically used as hedges for short positions, short sellers have little choice but to buy back NVDA stock if the shares rally back toward their all-time highs.
As for January implieds, options traders are pricing in a potential move of about 8.5% for NVDA stock through expiration on the 20th. This places the upper bound at about $110, while the lower bound lies near $93.
Unless CEO Huang dazzles investors this Wednesday, a return to $120 seems unlikely by the time January options expire, though a return to $110 is entirely likely. Support, at least over the short-term, should hold in the $100 region (barring any major hiccups).
2 Trades for NVDA Stock
Call Spread: Traders looking to bet on a short-term rebound might consider a Jan 2017 $105/$110 bull call spread. At last check, this spread was offered at $1.51, or $151 per pair of contracts. Breakeven lies at $106.51, while a maximum profit of $3.49, or $349 per pair of contracts, is possible if NVDA stock closes at or above $110 when January options expire.
Put Sell: On the other hand, buying power for Nvidia might not be as robust as the rally we saw in December — especially if short short sellers hold their ground or CES fails to offer up any new drivers. It doesn’t mean that there is no upside for NVDA, but that gains may underperform implieds. As such, traders looking for a neutral-to-bullish stance might consider a Jan 2017 $95 put sell, just to be on the safe side.
At last check, this put was bid at $1.77, or $177 per contract. If NVDA stock closes at or above $95 when January options expire, traders entering this position will retain the premium received for opening the position. However, if Nvidia trades below $95 ahead of expiration, then traders may be assigned 100 shares at a price of $95 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
