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How to Trade Nvidia Into Earnings

Nvidia (NASDAQ:NVDA) shares cooled just ahead of its long-awaited four-for-one stock split. But the decline didn’t last long. Once the price adjustment hit and NVDA stock suddenly became 75% cheaper, buyers returned. Since then, prices have been quietly climbing and are now within a pebble toss of the old peak.

NVIDIA (NVDA) logo on wall
Source: JHVEPhoto / Shutterstock.com

But it’s not just Nvidia that’s been returning to its bullish ways; the entire semiconductor industry is waking up, fueled by a trio of better-than-expected earnings reports by Qualcomm (NASDAQ:QCOM), Advanced Micro Devices (NYSE:AMD), and On Semiconductor (NASDAQ:ON).

Remember, stocks exhibit a strong correlation with their respective sector and industry. Both technology and the semiconductor industry are trending higher and notching new records, which only helps the bullish case for NVDA.

Below we’ll review the price chart of semiconductors, discuss Nvidia’s looming earnings report, and share a potential trade idea if you think the company delivers the goods.

Semiconductors Are Heating Up

From February to July, the Vaneck Vectors Semiconductor ETF (NASDAQ:SMH) basically went nowhere. The five-month rest was well-deserved, though. Semis rocketed to the moon during last year’s post-pandemic broad market rally and needed a rest so earnings could catch up and valuations could shrink.

But if the last week is any indication, buyers are finally ready to take semis higher.

If you want a poster child for the awakening, look no further than Advanced Micro Devices, which took a page out of the meme stock playbook and zipped 23% in short order after breaking above $100 last week.

Semiconductor ETF (SMH) with bullish breakout
Source: The thinkorswim® platform from TD Ameritrade

Volume and volatility spiked alongside price to provide further evidence that the masses piled in and speculation ran wild. So it won’t take much for their attention to turn to Nvidia and continue propelling it higher if the chip giant can deliver quality earnings numbers on Aug. 18.

AMD’s brilliance aside, SMH paints a bullish picture for the industry and tells you everything you need to know about how investors are feeling about semis right now.

NVDA Stock Earnings Trade

With NVDA stock earnings still a week and a half out, it’s a bit tricky to nail down the exact expectations for the overnight response. It’s a moving target at this stage. But we can look at the options contracts that expire just after the report to gauge volatility assumptions.

The Aug 20 contracts are baking in a move of $16.86 or 8.2%. Keep in mind the lion’s share of that is due to the 15 days that remain. Strip that out, and we’re probably looking at an expected move of 4% or so.

Nvidia (NVDA) stock chart with bullish uptrend
Source: The thinkorswim® platform from TD Ameritrade

If that doesn’t seem like that much excitement, it’s because it’s not. Curious enough, for a stock that tends to move quite a bit on a week-to-week basis, NVDA stock has a history of small moves after earnings.

So this quarter’s subdued forecast is actually on par with past episodes.

The few other semiconductor stocks that gapped down after earnings this season didn’t see much downside follow-through. Instead, buyers swarmed to buy the dip in virtually every case I studied. This should work to the advantage of the following trade idea.

If you’re willing to bet NVDA stock remains above $175 for the next month, then sell September bull puts at that strike.

The Trade: Enter the September $175/$170 bull put spread for 60 cents.

If Nvidia pushes higher after earnings or at least doesn’t gap down too much, then the trade should be an easy winner. The max gain is 60 cents, and the max loss is $4.40. To minimize the damage if wrong, consider exiting on a break of $175.

On the date of publication, Tyler Craig was LONG AMD and QCOM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Article printed from InvestorPlace Media, https://investorplace.com/2021/08/nvda-stock-how-to-trade-nvidia-into-earnings/.

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