Today after the close Nvidia (NVDA) will report its Q3 earnings. The options market is implying about a $14 move tomorrow or ~7% in either direction which is basically inline with the four-quarter average one-day post-earnings move of ~7.5%.
Shares of NVDA are up 56% on the year, in just the last week making a new 52-week high:
While the stock’s run in 2019 is nothing short of impressive it is important to put in some context, coming a year after a disastrous 2018 where the stock saw a nearly 60% peak to trough decline from its all-time highs and closed down more than 30% on the year. With the stock just above $200 it is basically at the mid-point of its three-year range. To suggest that the stock is in no man’s land is an understatement.
For the current fiscal year, analysts are expecting a 20% eps drop and about a 10% sales drop, but given the stock’s ytd performance it is clear that investors are gearing up for the reacceleration of growth in 2021, where analysts expect eps to grow at 34% on 20% sales growth. At current levels, those estimates place the stock at 39x trailing eps and 29x forward, which is still below the late 2017 peaks of 45 & 40x respectively:
My Take: I am hard-pressed to think the company will be able to issue results and guidance that will be able to move the stock higher in-line with the implied movement tomorrow, especially given the stock’s recent run from $170 since the start of October. That said competitor AMD has been on a runaway breakout since issuing guidance last month that first had the stock down marginally bu then upon some investor reflection it has been off to the races…
SO what’s the trade? I’ll offer one bullish and one bearish, with defined risk depending on one’s directional inclination...
If I were inclined to play for a pullback towards $180 in the coming weeks I might consider a put spread in December:
Bearish Trade Idea: NVDA ($208) Buy Dec 205 – 180 put spread for $7
-Buy to open a Dec 205 put for $9
-Sell to open 1 Dec 180 put at $2
Break-even on Dec expiration:
Profits of up to 18 between 198 and 180 with max gain of 18 at 180 or lower.
Losses of up to 7 between 198 and 205 with max loss of 7 at 205 or higher.
Rationale: this trade idea risks 3.4% of the stock price, has a break-even down 5% and offers a potential payout of 9% if the stock is down 13.5% in a month, which includes an earnings event that has a one day implied move of 7.5%. The options market is suggesting this trade has about a 28% chance of being break-even on Dec expiration and only a 12% chance of being at max payout on Dec expiration. Not exactly a great risk-reward but it highlights just how hard it is to own short-dated near the money premium into events like earnings in high vol & valuation names like NVDA.
If I were inclined to play for a run-away breakout I might consider the following call spread in Dec expiration…
Bullish Trade Idea: NVDA ($208) Buy Dec 210 – 240 call spread for $8
-Buy to open 1 Dec 210 call for $9.40
-Sell to open 1 Dec 240 calls at $1.40
Break-even on Dec expiration:
Profits of up to 22 between 218 and 240 with max gain of 22 at 240 or higher
Losses of up to 8 between 210 and 218 with max loss of 8 at 210 or lower.
Rationale: this trade idea risks 3.9% of the stock price, has a break-even up 5% and offers a potential payout of 11% if the stock is up 15% in a month, which includes an earnings event that has a one day implied move of 7.5%. The options market is suggesting this trade has about a 35% chance of being break-even on Dec expiration and only a 12% chance of being at max payout on Dec expiration.