Nvidia Corporation’s (NASDAQ:NVDA) 12-month stock performance has been inspiring but not without a few dips like the one in early April. They say nothing goes up in a straight line but for a while NVDA looked like it would have been the first.
The earnings season was not kind to the sector mostly thanks to Advanced Micro Devices, Inc. (NASDAQ:AMD). Wall Street demolished the stock yesterday and took most of its competitors down in sympathy. Intel Corporation (NASDAQ:INTC) was the standout exception, up on the day.
NVDA reports earnings next week and after seeing the reaction in AMD, going long into the event will require courage. Buying the stock at face value here without any room for error will be hazardous.
Fundamentally Nvidia stock is not cheap at a 40 price-to-earnings ratio. Luckily analyst expectations are distributed among three categories. Although there is no guarantee that there won’t be downgrades, if they come they are not likely to pour in from an overwhelming majority.
Click to Enlarge Technically, the NVDA stock range is tightening, with lower highs knocking on the floor boards. So far, the body language of the price action has been bullish. I call this being technically frisky and just below a pivot area of $108 per share. On May 1, NVDA looked like it would break out in two steps to retest $109-plus, but price has since faded back to the trend line.
On the flip side, there is technical danger looming below, especially going into a binary event like the earnings. If NVDA loses the $96 neckline area it could invite sellers all the way to $88. After seeing the slaughter in AMD’s stock, one must remain open to that possibility.
NVDA Stock Trade Idea
The Bet: Sell the July NVDA $80 put for 75 cents per contract, where I have an 85% theoretical certainty that the contract will expire worthless and for maximum gains in my favor. Otherwise I will be put the stock and suffer losses below $79.25 per share. In essence, I am being paid here for the chance to own NVDA stock at a 20%-plus discount.
Although this sounds safe enough but after seeing the extreme reaction in AMD I’d rather be safe and buy cheap shorter term May $80 sacrifice puts to cover the crash scenario. This would be a small price to pay for some peace of mind.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
