- Nvidia (NVDA) reports earnings May 25.
- Shares are down nearly 50% from the all-time highs last November.
- Selling super expensive puts to be a buyer of NVDA stock on further weakness.
Nvidia (NASDAQ:NVDA) is due to report earnings on May 25. Expectations are for $1.20 in earnings per share (EPS) on $8.1 billion in revenue. The whisper number, or what the analysts really think, is for $1.35 in EPS.
NVDA has trounced earnings expectations each of the last four quarters yet the stock price has gone nowhere in that same time frame. This combination of a stagnant stock price and earnings beats means the price/earnings (P/E) ratio has fallen considerable. The current P/E of 44, although still not cheap, now stands at the lowest level in the past year.
Certainly the analysts like NVDA stock. TipRanks shows a consensus “Strong Buy” rating with a $329.05 average price target for the 27 analysts covering Nvidia. This implies over 90% upside. The lowest price target is a still rather respectable $217.
InvestorPlace contributor Vandita Jadeja likes NVDA stock at current levels as well. She believes it is a buy in front of earnings.
NVDA stock closed at the lowest levels since last June. The stock price has been cut in half since making all-time highs just six months ago. Because of this, Nvidia failed to hold the critical $200 support area and is now reaching oversold levels.
Its 9-day Relative Strength Index (RSI) is back under 30. Bollinger Percent B just turned negative. The Detrended Price Oscillator is nearing the lowest readings of the past year. NVDA is trading at a big discount to the 20-day moving average.
Previous times four times all these indicators aligned in a similar fashion marked significant lows in the stock. If history holds, look for a bounce in NVDA. A move back towards the 20-day moving average, and previous major support area, near $200 would be the initial price objective.
Implied volatility (IV) in NVDA options is at an extreme. The current IV percentile now stands at 100%. This means options prices for NVDA stock are the most expensive they have been in the past 12 months.
Selling strategies are favored when constructing trades given the rich price for options. Positioning to be a buyer of NVDA at a discount by selling puts makes probabilistic sense. Get paid now to be a buyer of NVDA stock lower and later.
How to Trade NVDA Stock Now
Sell the NVDA Dec $150 puts for $20.
If you sell the Dec $150 put, you bring in $2000 in option premium upfront for each put option sold. Your maximum gain on the trade is realized if NVDA stock closes above $150 at December option expiration.
The net purchase price for Nvidia equates to $130 ($150 strike price less $20 premium received) if NVDA stock is below $150 at December expiration. Of course, you can buy back the the initial put sold at any time prior to option expiration to close out the trade.
The $150 strike provides a 11.5% discount to the $169.50 closing price for NVDA stock. If NVDA falls by less than that at expiration you get to keep the initial $2000 premium and move on. The net purchase price of $130 implies a 23.3% discount to the latest closing price for those looking to acquire NVDA stock.
Each put sold is an obligation to buy 100 shares of NVDA stock. Important to make sure you sell only as many puts as shares you wish to ultimately own.
More risk averse traders may want to consider selling a defined risk put spread in place of a naked put sale. For example, sell the Dec $150/$145 put spread for $1.75 net credit. Maximum gain on the trade is the $175 net premium received. The maximum risk is $325, making return on risk 53.84%.
Investors and traders both may want to consider put selling in place of an outright stock purchase. In essence, it is a way to capture rich option premium and buy a beaten up NVDA stock at a substantial discount.
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.