All eyes are on Nvidia (NASDAQ:NVDA) as it preps for its earnings report later today. It is entering the quarterly dance hot as a freshly fired pistol at nearly $500. The growth story for NVDA stock has been epic, with much of the acceleration coming since the infamous March bottom.
Today we’re going to look at how traders might position themselves ahead of this afternoon’s earnings report. Rather than flying blind into the binary event, we’ll use information hidden in the options market to build expectations properly.
Though Nvidia is loved by momentum traders and has a reputation for generating mouth-watering gains, its response to each earnings announcement has been relatively muted. By analyzing options prices, we can determine just how much movement the market is pricing into the gap that is likely to arrive overnight. The so-called market maker move is $29, translating into a roughly 6% shift up or down. So there’s our baseline. From a probability perspective, there’s a 68% chance that NVDA stock will move that much or less. Betting it will move more than that is the lower-odds wager.
Sadly, the direction of the jump remains shrouded in mystery. This is why I don’t advocate building big directional bets ahead of the coin flip. My preference, instead, is to craft a volatility-based trade focusing more on how much we gap verses which direction.
We’ll get into which strategy I prefer this go around in a moment, but first, let’s consider how the price action may be swaying traders into the number.
NVDA Stock Charts
Since Nvidia is the last major semiconductor company stepping up to the earnings plate this quarter, we can glean some insight by analyzing how Wall Street responded to its peers. With the sole exception of Intel’s (NASDAQ:INTC) disaster, traders cheered the performance of every other major name in the space. From Advanced Micro Devices (NASDAQ:AMD) and Taiwan Semiconductor (NYSE:TSM) to Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT), gains were had across the board.
The bullish undertones understandably have traders leaning bullish into Nvidia’s number.
The million-dollar question is whether the good news is priced in. At nearly $500, NVDA has risen about 43% in the past quarter. Its trend and momentum are both extremely bullish and suggest that even if we do see profit-taking after, the dip will prove a buying opportunity. Because its advance has moved in a stair-step fashion, multiple support zones are looming beneath. This should limit the severity of any kind of post-earnings plunge.
Two Top Earnings Trades
My favorite volatility-based trade to capitalize on what are likely to be overpriced options is the iron condor. Consider it a bet that NVDA follows the high-probability path of moving as much or less than expected. The trade consists of selling an out-of-the-money bull put and bear call spread for a net credit. The premium received is the max reward.
Iron Condor Trade: Sell the Sep $420/$425/$585/$590 iron condor for $1.40.
You could either take profits on the day after earnings or wait until you capture 50% of the max gain.
If you’d prefer to wager NVDA stock follows in the footsteps of its well-behaved brethren, then you could lean slightly bullish by using bull put spreads.
Bull Put Trade: Sell the Sep $430/$425 bull put for $1.00 credit.
If Nvidia stays above $430, then you’ll capture the $100 profit per spread. The initial cost and risk is $400, though you can limit the damage by exiting if the stock falls below $430.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held bullish positions in AMD.
