Nvidia Corporation (NASDAQ:NVDA) doesn’t release its fourth-quarter earnings report for another week-and-a-half, and there’s already blood in the water.
Short sellers are fleeing NVDA stock in droves ahead of next week’s report, cutting their losses short ahead of an expected rally that could see Nvidia stock top $120. And there’s still more rally fuel left in the tank for NVDA stock.
Nvidia will step into the earnings confessional after the close of trading next Thursday, with analysts expecting earnings to rise 137% to 83 cents per share from 35 cents per share in the same quarter last year. Revenue, meanwhile, is expected to soar 50% to $2.1 billion, driven by strong product expansion into the artificial intelligence, self-driving cars, virtual reality and gaming markets.
But expectations may be even higher, as EarningsWhispers.com places the whisper number at 87 cents per share for Nvidia.
Guidance may be an even bigger driver, with Nvidia providing graphics chips for the Nintendo Switch and entering partnerships with several automotive giants, including Audi, to revolutionize driverless cars.
On the sentiment front, short sellers have taken note of NVDA stock’s strength. In early January, short sellers were betting that a round of profit taking would send NVDA stock back below $100, thus exacerbating the overall decline. However, NVDA rebounded from technical support, and the shorts are now fleeing in droves.
In fact, during the most recent reporting period, the number of NVDA shares sold short plunged by 33% to 36.7 million shares. But while the short-to-float ratio has crashed lower, it still represent 7.14% of the total number of NVDA shares available for public trading. In other words, there’s still plenty of shorts left to squeeze, meaning additional buying power for NVDA stock.
Click to Enlarge Surprisingly, these remaining shorts don’t appear to be all that concerned — at least according to NVDA’s options configuration.
Currently, the February put/call open interest ratio rests at an elevated 1.31, with puts outnumbering calls easily.
Furthermore, this ratio rises to 1.33 for the 10 Feb series. Once again, with calls typically used as hedges for short positions, the remaining NVDA short sellers have little choice but to buy back their shares if NVDA heads for record highs once again.
As for 10 Feb implieds, options traders are pricing in a potential post-earnings move of about 9.8% for NVDA stock.
This places the upper bound at about $123 — in record territory — while the lower bound lies near $101, just above key support at $100.
2 Trades for NVDA Stock
Call Spread: Traders looking to bet on a post-earnings rally for NVDA stock might consider a Feb $115/$120 bull call spread. At last check, this spread was offered at $1.53, or $153 per pair of contracts. Breakeven lies at $116.53, while a maximum profit of $3.47, or $347 per pair of contracts, is possible if NVDA stock closes at or above $120 when Feb. options expire.
Put Sell: On the other hand, geopolitical headwinds are stirring this week, and there’s no telling what President Trump will say or do next. There is also the off chance that Nvidia offers up a cautious outlook for 2017 due to political uncertainties. As such, traders looking for a neutral-to-bullish stance might consider a 10 Feb $100 put sell.
At last check, this put was bid at $1.37, or $137 per contract. If NVDA closes at or above $100 when 10 Feb options expire, traders entering this position will retain the premium received for opening the position. However, if NVDA stock trades below $100 ahead of expiration, then traders may be assigned 100 shares at a price of $100 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.