Nvidia (NASDAQ:NVDA) stock is trading at the lowest levels over the past three months.
NVDA stock has now fallen 30% from the all-time highs near the $345 level in late November following a big earnings beat.
Certainly some of the red-hot rally that propelled Nvidia to those highs was overdone.
In a similar fashion, the recent sharp sell-off has gotten overdone as well. Time to be a buyer of an oversold and suddenly underloved NVDA on any further weakness.
The recent rise in interest rates has finally brought valuations into question. InvestorPlace contributor Dana Blakenhorn took a deep dive into NVDA and valuation concerns when the stock was trading at $278 in late December.
He noted the still sky-high multiples that were beginning to scare off investors but remained a long-term bull.
Now that NVDA stock has dropped another $37 points since then to trade near $241, some of the valuation concerns may be starting to soften. The analysts tend to agree.
Currently, NVDA is rated a strong buy with a $359.17 consensus price target according to TipRanks. This implies nearly a hefty upside.
The lowest individual price target is $285. Vandita Jadeja recently noted that Citi analyst Atif Malik has put NVDA on a positive catalysts watch following the Consumer Electronics Show.
Technical Take on NVDA Stock
Nvidia is nearing oversold readings that have corresponded with short-term lows in the past. The nine-day RSI is below 25 and at the most oversold readings of the prior 12 months.
MACD is deeply in the red. Momentum has fallen back towards the lowest levels of the past year. Bollinger Percent B is now below zero. NVDA stock is trading at a large discount to the 20-day moving average.
The last four times all these indicators aligned in a similar fashion marked significant short-term lows in the stock price. I expect the same to play out once again. Look for NVDA to make a run back to the 20-day moving average area at $285 over the next several weeks.
I wasn’t always bullish on NVDA stock. In my last research piece from Sept. 3 I had a short-term bearish viewpoint on an overbought NVDA.
I recommended selling an out-of-the-money bearish call spread which proved to be prescient and profitable. In a similar vein, an out-of-the-money bullish put credit spread now makes probabilistic sense to fit into a somewhat bullish near-term outlook.
Implied volatility (IV) is up sharply in NVDA options. It now stands at the 75th percentile meaning option prices are comparatively expensive. This favors incorporating option selling into the overall trade structure.
How to Trade It Now
Buy NVDA Feb. 11 $215 puts and sell NVDA Feb. 11 $220 puts for a $1.20 net credit
Maximum gain on the trade is $120 per spread. Potential maximum risk is $380 per spread if NVDA stock closes below $235 at Feb. 11 expiration.
Return on risk is 31.57%. The short $220 strike price provides an 8.9% downside cushion to the $241.50 closing price of NVDA.
Earnings are due Feb. 16 for NVDA. Expectations are for $1.01 in earnings on $7.42 billion in revenues.
The spread expires on Feb. 11th which is before the earnings date. This eliminates any earnings-related risk and helps to dampen volatility.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.