Fall is in the air and the final quarter has begun. And right now, Nvidia (NASDAQ:NVDA) bulls should get better prepared for market-leading seasonal strength using a well-placed, modified butterfly spread on NVDA stock. Let me explain.
NVDA stock enjoyed a terrific session to kick off the week with a gain of nearly 3% extending Friday’s analyst-driven spike of 5% to fresh all-time-highs. Behind Monday’s follow-through, another of Wall Street’s Nvidia bulls chimed in.
Analysts at Oppenheimer wrote that Nvidia’s dominance in the server market appears secure right now. The firm also noted NVDA stock’s new Turing chipsets should see improved traction as inventory from its prior generation Pascal chipset is removed from the market.
But NVDA stock does maintain its share of doubters. Some on Wall Street question the hefty $1,200 tag of Turing and reviews for the latest new, new thing haven’t been the greatest. And others, like Canaccord analyst Martin Roberge, simply question Friday’s above-the-market $400 price tag and wonder if this is October 1999 and shortly before the Dot.com bubble burst.
Our view appreciates the reality that markets do rhyme, but they don’t repeat. And often enough the rhyming fails to show up or is absent long enough that it causes traders to pass on bullish situations like NVDA stock.
Technically speaking, despite NVDA’s incredible run the past couple years, shares are in position to move solidly higher. Monday’s follow-through gain not only vaulted Nvidia to new all-time highs, the price action signaled a breakout from a constructive, large rising wedge pattern.
The bullish contraction has developed since early 2018 after a quick and forceful rally to all-time highs in January. Now the series of smaller corrections centered near the January high has seen the pattern’s angular resistance cleared. And given the size of the base, Monday’s breakout bodes well for a rally to continue in NVDA stock.
NVDA Stock Bullish Options Combination
I’ll freely admit, I’ve been wrong before on NVDA stock. That was the case to a certain degree when I paired up the name with Advanced Micro Devices (NASDAQ:AMD) in late July. But charts aren’t static, conditions change and it’s our goal to accept what is happening and plan accordingly as smartly as possible. Given that, one position which looks well-suited to gain exposure to Nvidia while limiting and reducing risk is an intermediate-term bullish, modified call butterfly spread.
With shares up near $291, buying the Dec $310/$330/$340 call combination for up to $3.50 is favored. The cost of this spread ensures risk is limited to just 1.2% of owning NVDA stock, which in the event we’re wrong again, is an excellent insurance policy to own.
The placement of this spread demands NVDA stock will need to rally in order to gain in value at expiration as it’s currently out-of-the-money. But given the discussed technical platform and earnings in mid-November, going in-the-money is more than a bit reasonable in our estimate.
If Nvidia shares do proceed to rally, the sweet spot is if the stock lands on $330 at expiration immediately in front of Christmas. A profit approaching $16.50 would be possible. Now that would be a nice early present indeed. But in our eyes, the real gift is that unlike a regular butterfly this asymmetrical combination guarantees a profit. In the event we once again find ourselves underestimating NVDA stock, this bullish play ensures the trader keeps $6.50 above $340 instead of a loss. Happy holidays indeed!
Investment accounts under Christopher Tyler’s management currently own positions in AMD stock and / or AMD derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
