Yesterday, Walmart (NYSE:WMT) stole the show with a rare 10% earnings report rally. And it stole bids away from the trade in technology stocks, especially those in the chip sector like Nvidia (NASDAQ:NVDA) and Micron (NASDAQ:MU). So coming into the earnings event last night, NVDA stock was already at a disadvantage.
Indeed, management reported and traders punished it down 6% on the headline in after hours trading. NVDA beat the P&L expectations, but as it is these days, they guided lower on forward expectations and Wall Street hit the sell buttons.
It is easy to get scared out of a stock when it has had the run that NVDA stock has. Year-to-date, it came into the event up 55% in 12 months, which is double the performance of the Powershares QQQ Trust ETF (NASDAQ:QQQ).
Fast profits are usually weak hands.
Fundamentally, the company is still firing on all important cylinders. There were small issues with margins and some weaknesses from the crypto-related activities. But overall, the areas that really count are still as strong as they were before the report. Meaning that “this too shall pass” and therein lies the opportunity in Nvidia stock.
To nit pick this bearish action, the options markets had priced in a +/- $17 move on this headline, yet here it is, down less than half that. If things were so bad, I’d expect the sellers to at least match and hold the downside limits. I don’t believe that the bears have claws to sustain selling this super star stock alone for long.
Yes, I believe that most dips in NVDA stock are potential entry points, yet I will not risk $250-per-share to buy the stock out right and leave no room for error. After all, the equity prices are near all-time highs and we have so many extraneous reasons to fret. Atop the list is the looming trade war.
Instead, in today’s trade I use options where I can still go long Nvidia stock but create a 20% buffer between its current price and my level of risk.
How to Trade NVDA Stock Today
NVDA is not cheap. It sells at a 44 trailing 12-month price-to-earnings ratio. But for a growth stock, this is not the parameter that counts. As long as NVDA is growing, I worry little about profitability. I want them to pursue the top line of the P&L and market share. This is a company that is setting the pace in several hot areas of future tech.
Technically, a stock that moves as fast as this is difficult for most traders to time. Nvidia stock’s steep rise created a wedge. Those typically are vulnerabilities for dips and this is one of them. Here is the important point: These dips do not change the fundamentals. Not in this case.
The Trade: Sell the NVDA Dec $190 put. This is a bullish trade for which I collect $2.50 to open. I have an 85% chance 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 breakeven point of $187.50.
Selling naked puts is daunting, especially with momentum stocks. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the NVDA Dec $195/$190 bull put spread, which has about the same odds of winning and would yield 12% on risk. Compare this with risking $250-per-share here and without any room for error, except a rally profit.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for NVDA stock to hold for the near-term. Time will then do the heavy lifting and premiums will expire in my favor.
But, just in case, I have to be ready to own the shares at that level.
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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.
