Nvidia Corporation (NASDAQ:NVDA) is heading into the earnings confessional this Thursday. The company is expected to follow on the heels of Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) and post better-than-expected results.
However, there is a nagging worry for Nvidia stock in its technical backdrop.
For all intents and purposes, the setup heading into Thursday’s report couldn’t get much better. Both of Nvidia’s major competitors posted solid first-quarter earnings results and boosted guidance. Intel stock surged to record highs following its quarterly report, and AMD finally appears to have broken out of its short-term funk.
Tech stocks have seen solid year-over-year growth of late, and an improving outlook for semiconductor demand lifted results for both AMD and Intel — both of which are locked in a battle for market share in server, desktop and data center processing power.
But Nvidia has always gone its own way. The company dominates the gaming hardware market, with AMD’s newest GPUs not putting the same kind of pressure on Nvidia that its CPUs have on Intel. What’s more, Nvidia has a blockbuster hit on its hands with its graphics chips powering Nintendo Co., Ltd.’s (OTCMKTS:NTDOY) must-own Switch console.
Additionally, Nvidia is quickly gaining ground in artificial intelligence and data center processing power. After a pair of AI-driven cars crashed last month — resulting in fatalities — investors will be keeping a keen eye out for guidance on Nvidia’s AI development.
Click to EnlargeSo, everything appears rosy for Nvidia stock investors … with one exception, NVDA’s technical backdrop. The market hype engine has taken hold of NVDA this past week.
As a result, the shares are nearing technical resistance in the $250 region. What’s more, Nvidia’s 14-day relative strength index (RSI) is on the verge of signaling overbought.
That’s not to say that NVDA stock can’t continue to rally deep into overbought territory. The shares have done so in the past. But these periods of heavy buying are almost always followed by a reversion to normal … a period of profit taking that leads NVDA stock sharply lower.
Considering Nvidia’s strong market presence and solid long-term outlook, such dips in the shares should be considered buying opportunities.
2 Trades for Nvidia Stock
Trading Nvidia stock depends entirely on your investing goals. To realize those goals, you need to have some idea how the stock is expected to move following earnings. According to May implied volatility, NVDA stock is expected to move of about 7.3% following earnings heading into next week’s expiration. This places the upper bound at about $266, while the lower bound lies at $230.
Call Spread: Traders looking to bet on an immediate post-earnings rally for Nvidia stock might want to consider a May $257.50/$260 bull call spread. At last check, this spread was offered at 90 cents, or $90 per pair of contracts. Breakeven lies at $258.40, while a maximum profit of $1.60, or $160 per pair of contracts — a potential return of 77% — is possible if Nvidia stock closes at or above $260 when May options expire.
Put Sell: On the other hand, those traders looking to pick up NVDA stock at a discount following a potential sell-on-the-news development might consider a May $230 put sell. At last check, this put was bid at $3.03, or $303 per contract.
In this trade, if NVDA closes at or above $230 on expiration, traders entering this position will retain the premium received for opening the position. If NVDA does sell off and trade below $230, however, you can pick up 100 shares of NVDA for $230 for every contract you sell. Plus, you keep the premium received.
Getting paid to pick up Nvidia stock for $230 doesn’t sound too bad given the company’s long-term potential. Just make sure you’re prepared to own the shares at $230. Otherwise, sell a lower strike (the May $200 put) if you are just looking to collect the premium.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
