Nvidia Corporation (NASDAQ:NVDA) has been the poster child for the tech trade for over a year. As a result, its stock has been on fire up 108% in one year. This is five times more than Apple Inc. (NASDAQ:AAPL) or the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).
Investors have so far bought every dip, and now they have another opportunity. Yesterday, we had a negative headline that took it down 7.7%. The news is serious enough that it warrants caution, but it doesn’t completely erase the enthusiasm that attracted investors to it. Management announced that they halted global testing autonomous driving in light of the deadly Uber accident by a self driven vehicle
Consensus has been that NVDA is the perfect long into the new-tech trade thesis. It has its foot in the Internet of things, gaming and more. But yesterday the headline hit a big part of it, so the bullish resolve is under pressure.
Long term, self driving car advances will continue, but for now companies are taking the safe route. They want to avoid litigation, especially if more deaths occur. To make matters worse also yesterday Tesla Inc (NASDAQ:TSLA) had its own headline of a car-related death, so it was a confluence of instances that just made both headlines worse for each of the companies.
The macro economic thesis still favors a stock bulls in 2018, and therein lies my opportunity with NVDA stock today. I set a bullish trade but one that leaves plenty of room for error just in case this malaise wants to linger for a few more weeks. Since mid-February we have had one headline after another, mostly from politicians that have raised serious short-term concerns that spooked investors out of bidding stocks.
But after all said and done, I believe that the fundamentals will prevail in the mid to long term. Fundamentally, Nvidia stock, although not cheap, is not bloated either. Given its growth rate, a price-to-earnings ratio of 50 is not outrageous.
There is no help from experts here. A few months ago, most agreed that NVDA had more upside potential than downside risk. But now consensus is unclear. The stock is closer to the high end of their price targets. So we could see some target revisions in the near future.
Click to Enlarge Technically, NVDA around $215 per share has a pivot point. It served as a breakout line in January and has since served as support. But after yesterday’s move, the stock could retest that level soon. Even if it fails, there’s a similar level around $185 per share.
Since I am a conservative trader, I’d like to set my risk even lower than both of these lines. Luckily, using options I can choose where and when to place my risk. So to be safe, I will go out and time and much lower than current price so I don’t have to sweat moves like yesterday.
Once this selloff stabilizes, I can then add upside bullish trades but until then I have more faith in downside support than upside potential in this nervous stock market.
Nvidia Stock Trade Idea
The Trade: Sell the NVDA Sep $150 put. This is a bullish trade for which I collect $4.40 to open. I have a 85% certitude that I will retain maximum gains, but if the price falls below my strike then I own shares. I would then need to manage off my break-even point of $145.60.
Selling naked puts carries big risk, especially for a stock under fire like NVDA. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the NVDA Sep $150/$145 credit put spread. The spread has the same odds, but would deliver 12% yield on risk. Neither trade require a rally to profit.
Get my free newsletter and subscribe to my YouTube channel 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.
