Money for Nothing as Nvidia Stock Languishes Ahead of Month-End Earnings

Shares of Nvidia (NASDAQ:NVDA) continue to consolidate after pulling back from recent all-time highs. NVDA stock is now more than 10% below the $645.49 closing high on April 15. Certainly some of the weakness was warranted given the red-hot rally that preceded the pullback.

An Nvidia (NVDA) semiconductor chip on a black background.
Source: Hairem / Shutterstock.com

The selling has begun to slow though. Look for Nvidia to carve out a bottom near current prices given the solid fundamentals and improving technical backdrop.

Nvidia reports earnings on May 26. Expectations are for $2.61 in EPS on $5.32 in revenues. The company has beaten earnings expectations in the last eight quarters, with the last two quarters showing significant upside surprise. This consistency of the earnings beats should serve to staunch any significant downside in front of the earnings release.

The analysts are certainly decidedly bullish on NVDA stock. The average analyst price target is $677.29, 17% above current levels. The lowest price target stands at $550. The consensus rating is a strong buy.

Technical Take on NVDA Stock

Shares of NVDA are about as neutral as it gets on a technical analysis basis. The nine- day RSI is trading near 50 after reaching overbought readings. MACD is hugging the zero line now that it has pulled back sharply from extremes. Momentum has turned slightly higher after reaching an extreme as well.

NVDA Stock one year price chart
Click to Enlarge

Source: The thinkorswim® platform from TD Ameritrade

There is major downside suport at the $580 area. NVDA stock has dropped back near the 20-day moving average of $602.41. Expect this consolidation to continue for NVDA in front of earnings on May 26.

NVDA stock is normally fairly well correlated to the Van Eck Semiconductor ETF (NASDAQ:SMH). This makes sense since Nvidia is the second-largest holding in the exchange-traded fund with a weighting of just over 8%. The normal correlation has broken down, however, over the past 30 days . NVDA stock has dramatically under-performed the SMH in that time frame. Look for Nvidia to close that performance gap and be a relative out-performer in the upcoming weeks.

Comparative chart NVDA to SMH
Click to Enlarge

Source: Stockcharts.com

My current neutral-to-slightly bullish stance on NVDA stock has shifted from a somewhat bearish stance a few weeks ago. I talked about it on April 14 during my weekly TD Ameritrade Network “Morning Trade Live” podcast. I expected an overbought NVDA to pullback from $625 toward the 20-day moving average and recommended a short-term put calendar spread trade.

Now that Nvidia has indeed dropped lower near the 20-day moving average, my previous guardedly bearish outlook has softened because price does matter.

So, to cash in on a continued consolidation pre-earnings, a defined risk short-term bull put spread makes probabilistic sense.

How To Trade It

Sell the NVDA stock May $565/$560 put spread for a 90 cents net credit.

Earnings, as previously noted, are due May 26. The expiration date for the trade is the traditional monthly May 21 options. This serves to lower the risk and avoid any potential outsized earnings related moves.

Maximum gain on the trade is $90 per spread. Maximum risk is $410 per spread. Return on risk equates to 21.95% in about two weeks. Not a bad return in such a short time frame, especially given the limited loss inherent in the spread structure.

The short $565 strike price is well below the major support level at $580. It also provides a nearly 6% downside cushion to the $600.38 closing price of NVDA stock.

I would use a meaningful break of the major support level of $580 as a stop-out level for the trade. Otherwise let both options expire worthless and keep the initial premium received to realize the full potential profit on the spread.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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