Corrections happen to the best of stocks and Nvidia (NASDAQ:NVDA) has proven no exception to that rule. Still, after looking past the rearview mirror it’s time to embrace today’s favorably advantageous levels and go long Nvidia stock in one of two ways. Let me explain.
Since last October’s all-time-highs, when a seemingly invincible NVDA stock was making all the right moves in growth markets such as gaming, driverless vehicles, data centers or artificial intelligence and positioning itself to continue its dizzying two-year long rally of around 800%, Nvidia has fallen out of favor with Wall Street.
In Wall Street vernacular, Nvidia stock corrected. At its worst, Nvidia stock had slid 57% by late December of last year. And eight months later shares are still off by nearly 40%. In the process and off the stock chart, bullish animal spirits were also crushed with NVDA going from a wunderkind investment to a company facing insurmountable threats.
The two most obvious and persistent drags on Nvidia stock are an on-the-rise and more competitive Advanced Micro Devices (NASDAQ:AMD) taking market share and the U.S. China trade war. The latter is a well-known risk for the semiconductor industry and potentially an even larger headache for Nvidia’s bread-and-butter GPU chips as national security for proprietary technologies is tightening.
The good news is, if history serves as any guide, today’s optically-challenged environment for Nvidia stock is as much of an extreme in investor behavior as its former can-do-no-wrong phase when price action and praise were lavished on shares by investors.
NVDA Stock Monthly Chart
NVDA’s big picture continues to shape up for bullish investors looking to gain exposure to Nvidia stock. There’s no guarantees we won’t be driving like Fred Flintstone over riding in autonomous vehicles, but what’s done is done on the price chart. And technically, this happens to be very good news for today’s investors.
On the monthly price chart, market sentiment and price action have produced a very well-supported corrective higher low, double-bottom pattern. The formation was confirmed in July. And Nvidia stock remains close enough to the June high signal price for investors to consider buying NVDA today.
Positioning in NVDA Stock
For investors agreeable to purchasing Nvidia stock, I have two strategies for positioning with risk-adjusted exposure. The first idea simply buys NVDA shares and size the position to account for risk of around $35.
This exit maintains stock risk of nearly 20%. It’s not an insignificant number by any means. But Nvidia is a volatile name whose price action works both ways. Further, as this stop-loss only closes the position if shares violate August’s inside hammer low, it works to keep bulls in the game without playing too tightly.
The second approach for going long NVDA is a limited and reduced risk bull call spread. With Nvidia stock near $179, the January $185 / $205 call vertical for $6.85 is favored.
This combination keeps risk to less than 4% of owning NVDA outright with a holding period of nearly five months. And if shares can climb more than 14% over the spread’s life-cycle and just 6% north of 2019’s April pattern high, a max profit of $13.15 or return of 192% is possible.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in Advanced Micro Devices (AMD) and its 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.
