Business for Nvidia Corporation (NASDAQ: NVDA ) appears to be firing on all cylinders, but the charts of NVDA stock are showing a trend in motion that's a wee bit top-heavy. Thus, if you're looking to get on board one of the hottest stocks of the past year, I have a trade idea that helps discount some of the hype.
If we're to believe Nvidia's latest earnings report, it just doesn't get any better. It was a "great finish to a record year" as the company topped forecasts and bumped up guidance.
But there lies the rub. NVDA stock is faced with the possibility of becoming a victim of its own success on and off the price chart.
Longer-term, Nvidia appears to be in all the right markets poised for secular growth. From autonomous vehicles to gaming to virtual reality to cloud computing, NVDA is well-positioned for continued success. You'll get no argument from me here.
But Nvidia's success isn't exactly a secret at this point, and that's becoming a growing problem. For one, there's an inflated price for admission, with Nvidia stock sporting lofty ratios such as a forward price-to-earnings ratio of 33, price-to-sales of 8.5 and a price/earnings-to-growth ratio of 3.4.
Plus, NVDA now faces rising operating costs, potential gross margin compression, as well as data center, custom silicon and GPU workarounds competition. Nvidia could prove a very costly investment.
Failing that, the chart of NVDA stock is warning that a day of reckoning is nigh.
Nvidia Stock Chart
Click to Enlarge With NVDA shares up roughly 300% in the past 52 weeks, traders buying shares today are placing a lot of technical faith in extreme momentum continuing, rather than an overdue cycle of profit-taking beginning.
In my view, bullishness at Nvidia's current price is misplaced.
After 10 months of price action remaining tethered to Nvidia's upper Bollinger Band, shares are forming a bearish topping candle on the monthly chart. That's after hitting a brief and marginal all-time high in the immediate aftermath of the earnings report.
Even the best-sounding, well-supported growth narratives eventually give way to meaningful price corrections, even if they eventually resume their rallies. I don't expect Nvidia stock to be an anomaly to that durable tendency.
How to Trade NVDA Stock Right Now
One strategy that could allow you to profit from a correction in Nvidia and/or buy shares at a discount is an out-of-the-money credit put spread.
I suggest the March $100/$95 put vertical.
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NVDA stock is at $108.90, and the trade is priced at 60 cents. The spread collects the full credit as long as shares aren't below $100 at expiration. That would require a decline of more than 8%, which would put Nvidia's total correction at 17%.
We're looking to get paid as Nvidia diffuses its overbought condition. At the same time, the vertical does limit risk to $4.40 if the stock were to establish a stiffer correction below the protective $95 put strike.
If we ultimately want to buy NVDA stock on weakness, the most we'll pay is $99.40.
Also, if Nvidia establishes a larger (but still commonly corrective) move of 30% to $84.50 during the life of this vertical, the worst-case scenario is that our initial purchase price would work out to $89.90 through either assignment, or closing the spread and buying NVDA stock.
Investment accounts under Christopher Tyler's management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.