Nvidia (NASDAQ:NVDA) has certainly been on an impressive post-earnings run. After initially dropping to a low of $238.72 on Aug. 20 following the lukewarm earnings report on Aug. 16, Nvidia stock has rallied over 14% in the past five trading days to close at fresh, new all-time highs.
While some of the rally is warranted considering the potential of new Turing graphics cards, the magnitude of the move has now reached an extreme. Look for the recent red-hot rally in Nvidia’s stock to stall out over the coming weeks.
Nvidia reported earnings on Aug. 16 that were a mixed bag. Actually, per-share earnings of $1.76 per share beat expectations of $1.66 while revenues were pretty much in line at $3.12 billion.
Guidance for Q3 was disappointing, at $3.25 billion versus prior expectations of $3.34 billion. Nvidia now sports a rather healthy price-earnings (P/E) multiple of 40.05, well above the five-year average of 33.10 and also at a premium to other chip stocks.
The combination of weak guidance and a comparatively pricey multiple will likely temper any major move higher from current levels.
NVDA stock is also reaching extremes from a technical perspective. 9 day RSI is now overbought at a reading over 70. Previous instances when shares were this overbought proved to mark significant short-term tops.
Nvidia is once again trading at a big premium to the 100-day moving average of $247.13. When NVDA stock got to similar premiums previously, it inevitably led to a pullback toward the 100-day moving average.
This time should be no different.
Implied volatility (IV) in NVDA options is at the 25th percentile, meaning option prices are comparatively cheap, especially considering the historic volatility percentile of 38.
This favors long option strategies when constructing a trade. So to position for a pullback in NVDA stock, a defined risk put diagonal spreads makes probabilistic sense.
NVDA Stock Options
Buy NVDA Oct $270 puts and sell NVDA Sept $265 puts for a $5 net debit.
Maximum risk on the trade is $500 per spread. Ideally, NVDA stock closes near the $265 strike price at September expiration to realize the maximum gain. The spread is 10 deltas net short at trade inception, or the equivalent of being short 10 shares of NVDA stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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