Nvidia (NVDA) will report its Q3 results today after the close. The options market is implying about a $33 move in either direction tomorrow, or about 6%, which is rich to its 3.2% one-day average post-earnings move over the last four quarters.
Shares of NVDA are up 130% year to date, and up 200% from its 52-week lows made in mid-March. If you are long, or bullish into the print, there are just two lines to focus on in my opinion when looking at this chart, the double top from Sept 2nd and Nov 9th just below $590 and the uptrend from the March lows that the stock is currently trading below:
Since making an all-time high in early Sept, NVDA made one of the largest takeovers offer ever in the semiconductor space, a $40 billion cash and stock purchase of Arm from Softbank that the company said would be immediately accretive to margins and earnings.
My friend Jared Weisfeld, tech specialist extraordinaire at Jeffires offered the following setup into the print in a note to clients this week:
Into the October quarter, NVDA guided Gaming to be up just over 25 percent sequentially, with Data Center up in the low-to-mid-single digits percent sequentially. NVDA expects both Pro Vis and Auto to be at a similar level as in Q2. Buyside is at $2.2BN in gaming revenue for the October quarter vs. the street at $2.10BN and buyside is at $1.9BN for Data Center vs. the street at $1.83BN. Boiling it all down, buyside is at about $4.6BN vs. the street at $4.4BN for total October revenues. Into the January quarter, buyside is expecting gaming to digest the big October quarter ramp, although still above consensus. Folks are looking for $2.1BN in gaming vs. the street at ~$2.03BN and buyside is looking for another strong data center quarter into January, somewhere around $1.975BN – $2.00BN in revenue vs. the street at $1.87BN. Adding it all up, the January quarter revenue ‘bogey’ is around ~$4.6BN (roughly flat sequentially). vs the street at $4.419BN.
While NVDA for the most part remains a crowded long, I’m definitely sensing a bit more controversy/debate for two main reasons:
Will MLNX cause an issue for NVDA’s Data Center business in the October quarter? Recall, MLNX represents ~30% of NVDA’s data center business and historically MLNX has had some exposure in some slower growing verticals. To put in perspective…In 2019, HPE accounted for 11% of MLNX revenues and DELL accounted for 10% of MLNX revenues. Everyone remembers what just happened to Intel’s Enterprise and Government business…
Post print set-up. With respect to post print-setup, some are concerned heading into 2021 as NVDA laps the 2020 data center buildout, accelerated by WFH trends, and the Ampere product cycle.
I sense a note of caution with expectations high as a result of the stock’s massive outperformance, the company digesting large acquisitions, difficult comparisons for 2021, and the pull-forward of demand. Wall Street analysts remain in love with the stock with 33 Buy ratings, 5 Holds and 3 sells. The stock trades 50x next year’s expected earnings that are expected to grow 21% and 18x sales that are expected to grow 19%. A little rich for my blood, especially when you consider the pace of large M&A…
So what’s the trade?
First, for longs, who don’t want to sell the stock, but want to use options to add potential yield given high options premiums into the print, I think it makes sense to overwrite shares by selling out of the money calls to take in some premium. If I thought the stock would not have a big ramp this week I might look to sell a Nov call near the implied move…
vs 100 shares of NVDA long at $541 sell to open 1 Nov 570 call at $6
Profits of the stock up to $570, effective call away level is $576 (the short call strike + the call premium). If the stock were $570 or higher on Friday’s close to avoid having stock called away you could always cover the short call.
Losses of the stock below $535, current stock price less the premium received.
If the stock goes nowhere this week, above current levels, but below the short call strike, you will have added a 1.1% yield to your long stock position in two trading days.
If you thought the stock might have a late-year run but not make a new high you could sell a Dec 31st (year-end) call against long stock, for instance:
vs 100 shares of NVDA long at $541 sell to open 1 Dec 31st 590 call at $16.50
Profits of the stock up to $590, effective call away level is $606.50 (the short call strike + the call premium). If the stock were $590 or higher on Dec 31st prior to close to avoid having stock called away you could always cover the short call and keep long stock position intact.
Losses of the stock below $524.50, current stock price less the premium received.
For longs looking to define risk to the downside you might consider a collar, selling an out of the money call as detailed above, but then using the proceeds to buy and out of the money put, thus putting a floor below potential losses, for instance:
vs 100 shares of NVDA long at $541 Buy Dec 18th 500 – 590 collar for even
-Sell to open 1 Dec 590 call at $13
-Buy to open 1 Dec 500 put for $13
Break-even on Dec 18th expiation:
Profits of the stock up to $590, If the stock were $590 or higher on Dec 18th prior to close to avoid having stock called away you could always cover the short call and keep long stock position intact.
Losses of the stock down to $500, protected below.
Rationale: This zero-cost collar allows for $49 gains and $41 of losses between now and Dec expiration. One would do this against long stock if they were more concerned with extreme downside than upside, giving up some potential upside for potential downside protection at a price.
But If I were inclined to play for a beat and raise and Breakout to new highs I might consider a call spread in Dec 18th expiration, for instance:
Bullish Trade Idea: NVDA ($541) Buy Dec 550 – 600 call spread for $15
-Buy to open 1 Dec 550 call for $25
-Sell to open 1 Dec 600 call at $10
Break-even on Dec expiration:
Profits of up to 35 between 565 and 600 with max gain of 35 above 600
Losses of up to 15 between 550 and 565 with max loss of 15 below 550
Rationale: this trade idea risks 2.8% of the stock price, breaks even up 4.4%, and has a max profit potential of 6.5% of the stock price, or 3x the premium at risk if the stock is up 11% in a month.
If I were inclined to play for a miss and guide down, I would merely buy a weekly put spread, risking what I am willing to lose based on my conviction level, for instance:
Bearish Trade Idea: NVDA ($541) Buy Nov 535 – 495 put spread for $11
-Buy to open 1 Nov 535 put for $13
-Sell to open 1 Nov 495 put at $2
Break-even on Nov expiration:
Profits of up to 29 between 524 and 495 with max gain of 29 below 495
Losses of up to 11 between 524 and 535 with max loss of 11 above 535
Rationale: this trade idea risks 2% of the stock price, breaks even 3.1%, has a max potential profit of 5.3% of the stock price if the stock is down 9.3% in two trading days.