Shares of Nvidia Corporation (NASDAQ:NVDA) have fallen nearly 10% over the past several weeks, officially entering the bear market camp. Much of the damage was predicated on fears that AI and autonomous driving, two major driving forces behind the Nvidia stock rally, will be under closer scrutiny in the future. While certainly not a raging bull at current levels, I think NVDA stock will begin to find its footing with a period of consolidation likely looming over the intermediate term horizon.
Even following the recent carnage, Nvidia stock still sports a fairly lofty P/E of nearly 50. The current valuation, however, has actually dropped considerably from previous nose bleed levels. InvestorPlace contributor Bret Kenwell does a superb job taking a deeper dive into why the valuations are justified, given the growth rates in both earnings and revenues.
Momentum darlings such as NVDA trade more on technicals than fundamentals, especially in the most recent market environment. Nvidia stock currently sports a MACD reading below 2 for only the fourth time over the past year. The previous three times MACD reached such extreme levels of pessimism marked significant intermediate term lows in NVDA.
There is also major support at the $217.50 level with NVDA reversing sharply off that price area yesterday. This type of price action at major support levels bodes well for a short term rally, especially given how oversold Nvidia stock had become.
Nvidia options are fairly expensive, trading in the 68th percentile of implied volatility (IV). This favors option selling strategies when structuring trades. So to position for a period of consolidation in NVDA, a put credit spread makes intuitive sense.
Nvidia Stock Trade Idea
Buy NVDA Apr $190 puts and sell NVDA Apr $195 puts for a 70 cents net credit
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.27%. The short $195 strike price is well below the $217.50 support area and provides a 11.90% downside cushion to the $221.35 closing price of Nvidia stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
