Nvidia Corporation’s (NASDAQ:NVDA) 12-month stock performance has been inspiring but not without a few dips like the one in early April. They say nothing goes up in a straight line, but for a while NVDA looked like it would have been the first.
Reactions to the earnings this season have been mixed at best, so a slight negative reaction in a quality stock is not a game changer. While the stock market is still in a bullish phase leader stocks like NVDA will continue leading. They will have dips, but overall they will be opportunities for higher prices to come.
Coming into the earnings report, Nvidia stock was up 30% while the S&P 500 is flattish. This morning’s drop is still too mild to worry the bulls. In fact, the options open interest predicted it, as there was downside pressure to $254 per share and even to $246 (more on this in the link below). So this comes to no surprise to those who study the technicals.
We have entered into a new era for tech and NVDA is the new king of those companies. Consensus is that they are leaders in many of the exciting areas like artificial intelligence and self driving vehicles. So there is little doubt that they won’t be a dominant force for years to come.
Our lives are now more dependent on tech than ever and the acceleration rate of adoption is accelerating. So there is plenty of room for most suppliers to prosper especially premier ones like Nvidia
Fundamentally, the stock is not cheap with a price-to-earnings ratio of 54 but that’s not to say it’s bloated. This is an aggressive grower so a relatively high valuation is acceptable for as long as they deliver on that front.
This morning the stock is falling in spite of management delivering a beat on top and bottom lines. Investors were perhaps disappointed with the timid guidance into the second quarter. Nevertheless, this is not a reason to sell the stock so today I am going long once again.
No, I will not buy the shares outright and risk $254 going into the White House decision on tariffs. There is plenty of extraneous reasons to expect challenges to stock prices in general. So I use options, where I can be bullish but leave room for error.
Technically, NVDA was in the process of pricing out a measured breakout but now it’s back below the neckline. Luckily for bulls there are several support layers below so it’s a matter of choosing the appropriate one for my level of comfort.
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NVDA Stock Trade Ideas
The Bet: Sell the NVDA Jul $200 put for $1.50. This is a bullish trade which has an 85% theoretical chance of success. But, if the price falls below my strike, I would suffer losses below $208.50.
Selling naked puts is scary, especially during nervous markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell the NVDA Jul $205/$200 credit put spread, which has about the same chances of success and yields 10% on my risk.
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.