The shares of NVIDIA Corp. (NVDA) are poised to shine as brightly as the graphics produced by their core processing chips this morning. In pre-market trading, NVDA has jumped more than 4%, with traders reacting to stronger-than-expected third-quarter earnings. Specifically, NVIDIA said it earned $178.3 million, or 29 cents per share, in the quarter, up from $84.9 million, or 15 cents per share, a year ago.
On an adjusted basis, NVIDIA said it earned 35 cents per share, while revenue rose to $1.07 billion from 843.9 million in the same quarter last year. Wall Street was expecting earnings of 27 cents per share on revenue of $1.06 billion.
Looking ahead, the company said it expects revenue to arrive up or down 2% from the third-quarter, which translates to a range of roughly $1.05 billion to $1.09 billion – surrounding the consensus estimate for $1.06 billion.
The brokerage community apparently wasn't expecting much from NVDA heading into the company's quarterly report. According to data from Thomson/First Call, only 12 analysts following the stock rated it a Buy, versus 20 Holds and three Sell ratings. Furthermore, the consensus 12-month price target rests at a modest $16 –a mere 10% premium to NVDA's close at $14.47 on Thursday. Any upgrades or price-target increases from this bunch of holdouts could spur additional buying pressure.
Not everyone was buying the bearish hype, however. For instance, the stock saw buy volume of roughly 3.25 million shares on Thursday, compared to sell volume of 2.89 million shares. The result was a bullish bought/sold ratio of 1.13 for NVDA, which saw a net cash inflow of nearly $5 million on the day.
Additionally, options traders were call heavy heading into NVIDIA's quarterly report. The stock saw call volume of 46,044 contracts on Thursday, compared to put volume of 29,964 contracts. NVDA's resulting single-session put/call volume ratio arrived at a bullish 0.65, with calls nearly doubling puts on the day.
Diving into NVDA's open interest configuration, we find a heavy accumulation of calls (9,332 contracts) at the weekly November 15 strike. Also of note in the weekly November series are the 14 and 15 put strikes, where 5,475 contracts and 5,555 contracts reside, respectively. These weekly options expire at the close of trading today, and are extremely speculative.
In the front-month November series (contracts expiring on the 19th), peak call open interest resides at the 15 strike, totaling 13,016 contracts. Another 10,586 calls are open at the November 16 strike. Meanwhile, peak November put open interest numbers 13,176 contracts at the out-of-the-money 13 strike, while 10,085 puts are open at the November 15 strike.
From a technical stand point, NVDA has its work cut out for it. The shares have bounced back admirably from their annual low of $11.47, set on Oct. 4, and are currently perched above key support at their 50-day moving average. However, NVDA still has several hurdles still looming overhead. First, the stock has been unable to push past $16 since early July. Additionally, the equity's 200-day moving average has turned lower and is descending through the $16-$17 region.
As such, options traders looking to take advantage of follow-through buying in the wake of last night's quarterly report may want to offset their risk by selling out-of-the-money calls. For example, with NVDA set to open near $15, you could purchase an at-the-money November 15 call and offset the cost (and lower breakeven) by selling a November 16 call. This bull call spread was asked at about $0.28, or $28 per pair of contracts, at the close yesterday.
The maximum loss on this trade is the initial premium paid, $0.28, while breakeven lies at $15.28. The maximum profit, meanwhile, comes in at $0.72, or $72 per pair of contracts, and is reached if NVDA closes at or above $16 when November options expire. The profit/loss chart below should give you an idea of the potential returns from this strategy:
Disclaimer: I hold no open positions on any stocks, securities, or options mentioned above. Any ideas, and/or forecasts, expressed or implied herein are for informational purposes only, and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Use caution when trading options, and never risk more than you can afford to lose.
