Nvidia Stock Is Finally Showing Signs of Fatigue After Its Big Rally
Nvidia (NASDAQ:NVDA) stoc has pulled back from the all-time highs after a red-hot run post-earnings.
NVDA stock traded just past the $230 level before ultimately losing momentum.
Certainly, some of the rally was warranted given the earnings beat and dovish Fed speak from Jackson Hole.
The relentless rally has now come too far, too fast. Time to be a seller of NVDA on any further move higher. Earnings were released on August 18.
Nvidia beat on both the top and bottom line with revenues of $6.51 billion and EPS of $1.04 just beating estimates of $6.33 billion and $1.01. The company also guided higher as chip demand remains strong in the face of limited supply.
Earnings and revenue will likely remain strong for the next few quarters. They had better given the historically rich valuations for NVDA stock.
The current P/S ratio now stands at just over 26x. This represents by far the loftiest multiple in the past decade.
It is even more astounding considering that NVDA stock is now the eighth largest U.S stock by market cap. It will be difficult to continue to grow at the same pace given the current $557 billion dollar market cap simply due to the sheer size of Nvidia.
Trees don’t grow to the sky forever.
Technical Take on NVDA Stock
Nvidia shares reached overbought readings on Aug. 31 before finally weakening.
Nine-day RSI breached the 70 level but broke back below. Momentum also got to an extreme before softening. MACD topped out near the highest levels of the past year. NVDA is trading at a big premium to the 20-day moving average.
The last four times these indicators aligned in a similar fashion marked significant short-term tops in NVDA stock, as highlighted in the chart.
Shares subsequently pulled back to and through the 20-day moving average. Look for the same price action once again in Nvidia.
I didn’t always have a bearish opinion regarding NVDA stock. My previous article from July 23 had a decidedly bullish tone. Nvidia was trading at the $195 area at the time and I recommended selling an out-of-the-money August bull put spread.
This proved to be profitable. NVDA stock is up almost 15% from that time and my opinion has changed because price does matter.
So to position for a pullback or at least a period of consolidation, an out-of-the-money bear call spread makes probabilistic sense.
Shorting NVDA stock outright is both expensive from a margin standpoint and risky. Selling an out-of-the-money defined risk spread provides a solid return while still having a built-in cushion to have NVDA stock move against you. Both of these are critical components in this overall market environment.
How To Trade It
Sell NVDA Oct $245/$247.50 call spread for a 45 cents net credit.
The maximum gain on the trade is $45 per spread. The maximum risk is $205 per spread. Return on risk is 21.95% for the 45 day holding period (roughly 400% annualized).
Earnings are due on Nov. 17. The spread will expire well before then to avoid any earnings-related risk. The short $245 strike provides a 9.45% upside cushion to the $223.85 closing price for NVDA stock. It is also well above the all-time closing high of $226.88.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business report, while maintaining weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.
