Nvidia Corporation (NASDAQ:NVDA) reported earnings last night and traders hesitated before committing to the upside reaction. NVDA stock is now up 4% to new highs. What’s most impressive is that it’s on a morning where markets are swooning.
Wall Street thinks that Nvidia can do no wrong. Perception is that they have the best tech in the best areas of opportunities including self-driving and artificial intelligence (AI). I am agnostic on that front, and have been profiting from both sides of the fence.
Yes, I have had success shorting it, too, but more so on the bullish side than the bearish side. Today, I will join the herd and set another bullish bet, but one with caution.
I won’t risk $215 to buy the shares and expect a rally to profit. This would leave me no room for error. And to do this when markets are at all time highs would be reckless. Instead, I will use options where I can set a bullish trade but with a twist.
I will use the perceived value in Nvidia stock to finance a temporary bearish bet. If the dip doesn’t happen then my profits would be slightly lower. Else I have the chance to generate good profits for free.
Keep that in mind, because this next bit won’t win me popularity awards …
I said perceived value because NVDA sells at 60 price-earnings ratio. So much is priced into the stock already. Compare this to, say, Apple Inc. (NASDAQ:AAPL), which has a P/E under 20. I understand that NVDA is more exciting, but Apple’s story is right here and now. Besides, NVDA has a price-book over 20 compared to Apple’s P/B of 7.
I realize that they are different companies but my money doesn’t care. My goal is to choose the most worthy risk and I am putting this into perspective. Besides, NVDA stock is a lot more expensive than all its competitors. Its P/E ratio is triple that of Intel Corporation (NASDAQ:INTC) for example.
While it could be that it will grow into its price but there are no guarantees and it will be vulnerable to dips especially if politicians continue to cause volatility.
Click to Enlarge Coming into the earnings report, NVDA was already up 204% in one year. Just 12 months ago it was $90, now it’s over $215 per share.
Expectations are important and NVDA’s are through the roof. It is now trading well above the average price target and with little upside to the high mark.
Analysts will have to adjust their prices higher soon. When they do, this stock will rally on the headlines. But if they don’t then it could drift a lower.
The Bullish Bet: Sell NVDA Feb 2018 $170 put for $4.75. Here I have an 85% theoretical chance of success to retain maximum gains but if the price falls below my strike, I will accrue losses below $165.25 per share.
The Temporary Hedge: Buy Dec 22 $210/$207.50 debit put spread for $1. This is a bearish bet that in the next few weeks, NVDA would fall and it does pass my spread then I stand to double my money.
The net of taking both trade, is a net credit of $3.75. So I am already a winner and if price stays above my strike then any premium I collect from selling the debit put spread would be pure profits. This would get me past the political unrest in the US corporate tax debate and the Saudi Arabia situation.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.