Event: Nvidia (NVDA) report their Q3 results tonight after the close. The options market is implying about a 8% one day move tomorrow, which is shy of the average over the last 4 quarters of about 11%.
With the stock trading at $68.50 the Nov 11th (tomo expiration) 68.50 straddle (the call premium + the put premium) is offered at $5.70, if you bought that, and thus the implied move, you would need a rally above 74.20, which would be a new all time high, or a move below $62.80 to make money.
Price Action / Technicals: Shares of NVDA are up 106% year to date, and up 176% from its 52 week lows made in February. The stock has ever so slight technical support in the mid $60s, with considerable support at $60, the post Q2 earnings breakout level in August, with a massive air-pocket below to its 200 day moving average near $50:
Back in early October we had some thoughts on why the stock has been a rocket ship in 2017 (Graphic Novel), and some thoughts on the massive M&A in semiconductor space over the last year and half:
Most of the M&A focus so far has centered around the Internet of Things (IoT). And the premium to sales have been massive, with INTC’s $17bn bid for ALTR last year,and ADI’s recent $15bn bid for LLTC, both about 10x trailing 12 month sales of about $1.5bn, only outdone by Softbank’s $32bn bid for ARMH at a whopping 22x sales!! It is important to note though, the greater the annual sales the lower the premium that’s been paid
But what about the deals in GPU-land to get pole positioning for AI? The leader in GPUs is Nvidia (NVDA). Andreessen suggested that NVDA has “seemingly overnight become the leader in chips for AI”, going on to say that “every sharp AI entrepreneur that comes in (to their VC firm) is now building programs on NVDA chips”.
The stock has a $36bn market cap ($3.3 billion in net cash), about 6x its expected f20176 sales . Oddly, consensus estimates only have eps growing 12% in f2018 (next year) on a 7% yoy sales increase. Either consensus is very wrong, and Andreessen’s observations are yet to be fully factored in for growth in AI chips, or the market is way over paying for takeout potential.
Implied Volatility SnapShot: short dated options prices have exploded, trading at the highest levels since February, above the pre-earnings levels in May and August with 30 day at the money implied volatility at 52.6%, a massive gap above 30 day realized volatility (how much the stock has been moving at 29%)
Put volume today is already running 2.5x average daily volume with the Nov 18th 65 puts most active with 2,000 trading, while there also appears to be some downside put buying with 1,600 of the Nov 11th (tomo) 59 puts bought to open for 19 cents and 1,000 of the Nov 11th 60 puts bought to open for 3- cents. These could possibly be a disaster hedge for a long holder.
So What’s the Trade?
We’ve seen a pickup in intra-day volatility across a ton of sectors that’s not being properly reflected by broad market measurements like the VIX because the market is higher. One sector that has not been higher the past few days is technology, especially with large moves lower in former leaders like Facebook, Amazon, Apple an Google. Stocks in the semiconductor space are on a potential precipice as they’ve had a massive run higher in 2016. If stocks like NVDA were to disappoint the moves lower could be large.
We have an existing trade idea in the SMH (semiconductor etf) that targets a move to 63. With the etf below 68 this trade is in good shape for any further weakness. We’ll keep an eye on it and update soon.
For those looking to play NVDA directly the 50 day moving average around 66.25 is crucial. A break below that and there’s not a lot of levels to hang your hat on for potential support.
Buy the NVDA (67.70) Dec 65/60/55 put fly for .85
- Buy 1 Dec 65 put for 3.10
- Sell 2 Dec 60 puts at 1.50 (3.00 total)
- Buy 1 Dec 55 put for .75
Breakevens on Dec expiration:
Losses of up to .85 above 64.15 and below 55.85 with total loss of .85 above 75 and below 65
Gains of up to 4.15 below 64.15 and above 55.85 with max gain of 4.15 at 60 on Dec expiration.
Rationale – This trade is binary and fairly dependent on earnings. If the stock goes higher from here it could be a total loss, but there’s time until expiration in December, which means a small move lower or flat means it’s still in play. By being a butterfly it reduces premium as much as possible and offers a good risk/reward if the stock were to go lower from here. 60 seems like a decent level to target if that were the case.