Monday, May 8, 2017

NVIDIA: Ahead of Tomorrow's Earnings, Options Implied Volatility Is Surging (NVDA)

Long-time readers may have noticed that after two years of cheerleading the stock we've been very quiet since December 27's "As NVIDIA Notches Its 10th Straight Daily Gain, Lots Of People Say Nice Things...HOWEVER (NVDA)":
...We agree and start to lighten up right here, right now. And any weakness in the overall market means lighten up some more.
That was at $116.49 up $6.71. Here's the action over the last year:

NVDA NVIDIA Corporation daily Stock Chart

$110 is still the magic number, until the stock clears that we have no interest on the long side, more after the jump. $103.18 -0.68 (-0.65%) last.

From Zacks:
Investors in NVIDIA Corporation NVDA need to pay close attention to the stock based on moves in the options market lately. That is because the Dec 5th 2017 $105.00 Put had some of the highest implied volatility of all equity options today.

What is Implied Volatility?
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.

What do the Analysts Think?
Clearly, options traders are pricing in a big move for NVIDIA Corporation shares, but what is the fundamental picture for the company? Currently, NVIDIA Corporation is a Zacks Rank #3 (Hold) in the Semiconductor - General industry that ranks in the Top  14% of our Zacks Industry Rank. Over the last 60 days, analysts have neither increased their earnings estimates for the current quarter, nor have dropped. The net effect has taken our Zacks Consensus Estimate for the current quarter from 67 cents per share to 66 cents in that period....MORE
Regarding the resistance at $110, here's March 24's "Nvidia's Stock Is Not Yet Out Of The Woods (NVDA)":

...We focus on the stock, not the company. The company should be fine for at least the next couple years until the artificial intelligence biz catches up to NVIDIA and either takes a different approach or a really different approach and goes quantum computer.

First up, Investopedia March 22:

Nvidia Not Out Of The Woods Yet (NVDA)
Nvidia Corp. is trading up about 1%, gaining back some of its losses from yesterday. Shares fell yesterday from around $110 to around $106. Certainly, the $110 level has been a problem for the stock over the last couple of days. The bigger problem is, where do shares go from here? In a stock like NVDA, just getting the direction right is a challenge, let alone figuring out what the market thinks it could be worth.

As we wrote earlier this week, the stock would not be out of the woods until it was able to break over $110, and to this point, it has not been able to do that. The stock tried to get over that hurdle all day on Monday and Tuesday morning, but was unsuccessful in its attempts. (See also: Did Nvidia Just Break Out?)

The morning shares of NVDA gapped lower on February 22nd; momentum shifted, and until it can get back above $110, the momentum is downward.
(Interactive Brokers TWS, Hourly Chart)
One can easily see how the stock has clearly entrenched itself with some positive momentum and ran into a wall of selling just below $110....MORE
On March 21st Slope of Hope had made a similar point:

Gap and Crap
It’s been an, ummm, busy morning. This is the most profitable day I’ve had in a LOOOOOOOOOOONG time, and every single one of my 71 short positions (even the ones I opened today) are in the green.

Every. Single One.

I’ve got to update my stops, but in the meantime, here’s NVidia, which I just shorted today. It covered its gap, and it’s insanely overvalued. See ya later, Slopers.

We have a couple points of difference with Slope of Hope:

1) Premier growth stocks always look overvalued.
2) Shorting NVDA is a risky little game. When we said lighten up, we were talking to folks who owned it in the '20's from late 2015, not a short.

That said, his point about the resistance at $110 is sound for a very sharp, very short-term trader.
The next resistance of course is the double all-time-high top at $119-120 so $111-120 should be tradable to the upside but in the meantime just be aware of the areas the stock petered out.
$108.42 last, up $1.33.