Trade Ideas February 13, 2020

Nvidia (NVDA) FQ4 Earnings Preview / Trade Ideas

by Dan

Nvidia (NVDA) will report FQ4 results after the close today, the implied move in the options market is about 6.5%, more than double the 3% average one-day post-earnings move after the last four quarters. With the stock at $272.50, the weekly at the money straddle (the call premium + the put premium) is offered at about $18, if you bought that and thus the implied one-day movement you would need a rally above $290.50, or a decline below $254.50 to make money.

It is notable that the stock is up nearly 16% on the year so far, and up 100% from its 52-week lows made last June and if the stock were to achieve the implied move to the upside it would basically place it at the all-time high from October 2018:

 

On the downside, $240-$235 looks like decent near-term support at the intersection of the uptrend from the summer 2019 lows and the Jan 2019 break-out level:

 

Shares of NVDA trade about 38x fiscal 2021 expected adjusted eps growth of 30% and expected sales growth of 20%, a meaningful reacceleration from the year just completed’s nearly 10% eps and sales decline. The stock’s earnings multiple is finding its way back towards multi-year highs:

 

So what’s the trade? If the company is not able to confirm FY 2021 consensus for up 30% adjusted eps and up 20% revenue growth, the stock will be down 10% in a heartbeat. A beat and raise for FQ1 that suggests upside to 2021 and the stock will be flirting with new highs.

If I were inclined to play for a guide lower I might target $245ish over the next week, but look to do so with a put butterfly looking to offset elevated options premiums, for instance:

Bearish Trade Idea: NVDA ($272.50) Buy Feb 21st 270 – 245 – 220 Put Butterfly for $5

-Buy to open 1 Feb 270 put for $13

-Sell to open 2 Feb 245 puts at $4.50 each or $9 total

-Buy to open 1 Feb 220 put for $1

Break-even on Feb 21st expiration (next Friday):

Profits of up to 20 between 265 and 225 with max gain of 20 at 245, with profits of up to 20 between 265 and 225

Losses of up to 5 between 265 and 270 & between 220 and 225 with max loss of 5 below 220 or above 270

Rationale: this trade idea risks $5, or less 2% of the stock price and has a potential payout of 4x the premium at risk if the stock s down 10% in 5 trading days.

 

Or If I were inclined to play for a matched prior high near $292 I might risk what i am willing to lose, and buy a weekly call spread that expires tomorrow… for instance:

Bullish Trade Idea: NVDA ($272.50) Buy Feb 14th weekly 275 – 295 call spread for $7

-Buy to open 1 Feb 14th weekly 275 call for $9

-Sell to open 1 Feb 14th weekly 295 call at $2

Break-even on Feb 14th close (tomorrow afternoon):

Profits of up to 13 between 282 and 295 with max gain of 13 above 295

Losses of up to 7 between 275 and 282 with max loss of 7 below 275.

Rationale: this trade idea is binary, get the direction wrong and this is going to lose most of its value by lunchtime tomorrow. But if you are looking to define your risk, target the one day implied move then this is one way to do it. But ill offer a more normal disclaimer for long premium directional trades into events, you need to get a lot of things right to merely break-even, direction, timing and magnitude of the move.

 

A bullish trade idea that I could far easier get on board of would be a call calendar, selling a short-dated out of the money call, and buying a longer-dated one of the same expiration, for instance:

Bullish Trade Idea: NVDA ($272.50) Buy Feb 21st regular – April 290 call spread for $6

-Sell to open 1 Feb 290 call at $4.50

-Buy to open 1 April 290 call for $10.50

Break-even on Feb 21st expiration:

This trade performs best with a gradual move towards the 290 strike over the next 5 trading days into Feb expiration. If the stock is below 290 on Feb expiration the short 290 call will expire worthless and the trade will be left naked long the April 290 call. If the stock is close to 290 then the April 290 call will have appreciated as it will have picked up deltas. At that point it might make sense to further reduce the premium at risk by selling a higher strike call in April expiration turning the trade into a vertical call spread. The max risk f this trade is the $6 in premium paid, and would be at risk with a large move below the current level, or well above the 290 strike.

 

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