Shares of Nvidia Corporation (NASDAQ:NVDA) have been absolutely destroyed after making new all-time highs less than a month ago. NVDA is now down 32 points, or nearly 15%, from the $218.67 intraday high of Nov. 11, and it’s down 12.6% in just the past six trading days.
While Nvidia stock certainly moved ahead of itself on the rally higher, its most recent drubbing was way too harsh. I expect NVDA to find support near current levels.
In my previous post on NVDA I recommended caution in chasing momentum, which proved prescient. Of course, valuation and fundamentals are largely ignored in momentum names like Nvidia as long as the stock continues to head higher.
Once the music stops, however, those concerns come to the forefront. That was certainly the case for tech stocks generally, and Nvidia stock specifically, over the past week. Important to also remember that NVDA did beat by a large margin on the last earnings report, as our own Karl Utermolen highlighted.
A look at the technicals points to a potential bounce, or at least consolidation, in Nvidia stock. Shares are extremely oversold on a 9-day RSI basis with a reading of 25, which is the lowest level over the past year.
Previous instances when Nvidia was even close to this oversold proved to be a reliable indication of a significant short-term low in the stock. Nvidia also bounced off the key 100-day moving average of $183.10.
As an options analyst, implied volatility (IV) is a cornerstone of both my idea generation and trade structuring.
Implied volatility in NVDA is now at the highest level since just before the previous earnings report. This means options are richly priced, favoring selling strategies. Further, high levels of IV can signal an impending low in the underlying stock.
So to position for a bounce, or at least an end to the selling, an out-of-the-money put credit spread makes sense.
Buy NVDA Jan $160 calls and sell NVDA Jan $165 calls for an 80 cents net credit
Maximum gain on the trade is $80 per spread with a maximum risk of $420 per spread. Return on risk is 19%. The short $165 strike price provides an 11.60% downside cushion to the $186.66 closing price of Nvidia stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.