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Shares of graphics chip maker Nvidia had a great year.
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It is the preferred artificial intelligence in the market, as its valuation reaches a trillion dollars after shattering sales and profit expectations when announcing the first quarter results. The second quarter numbers are due out on Wednesday, and the question on everyone’s mind is where the stock will go next.
The most obvious answer to the question is somewhere, fast. The options markets indicate that Nvidia stock (symbol: NVDA) will move approximately 10%, up or down, after earnings.
Options markets are a useful tool for investors. A quick way to come up with the 10% number is to look at the prices of stock options that expire near the earnings date.
Call options give the owner the right to buy Nvidia stock at a fixed price – known as the strike price – by a certain date, while put options provide the right to sell. Nvidia’s call and put options with a strike price of $457.50, close to where the stock was early Wednesday, expiring Aug. 25, are trading for about $25 each.
This means that a trader can pay $50 to buy or sell Nvidia shares near where they are now. For this trade to work, the stock must move at least $50 between now and August 25th. Otherwise, the trader loses money. That’s a movement of about 11%.
(The biggest event between now and August 25th is, of course, earnings.)
This is the quick way to do the math. The more accurate method involves more math involving factors such as the difference in stock price and option strike price as well as time to earnings and time to expiry.
The point is, investors expect volatility. This is a safe bet. Nvidia stock is up 50% since it reported first-quarter numbers in late May. Shares rose 24% the day after the earnings report, in which Nvidia management directed second-quarter sales to about $11 billion while Street expected nearly $7 billion.
Traders who have this options trade don’t care if the stock goes up or down after earnings. Investors prefer to go up. It will probably take another hit with better-than-expected steering to keep the stock going higher. Wall Street expects second-quarter sales of $11.2 billion and third-quarter sales of $12.6 billion.
Where the stock will go after another big dividend is another question. CappThesis founder Frank Cappeleri noted in a note on Wednesday that a quarter deemed good enough for the bulls would send the stock above $480. Nvidia stock hit a record intraday high of $481.87 after first-quarter earnings, and a really bad number could send shares below $400 a share, heading towards $300.
Less than $400 comes from the gap. Nvidia stock has basically gone up to $400 from $300 in the blink of an eye. “The (upward) gap on May earnings was never challenged to the downside,” Cappeleri wrote. Stocks that jump up or down can sometimes close the gap in the subsequent trade. This did not happen to Nvidia. It can, but it would take a huge disappointment.
Cappeleri is not making a base call. He is a technical analyst who looks at charts to get a sense of what investors are thinking. “We’re not in the game of predicting earnings reactions,” he writes, describing the levels as just “things to watch,” adding that support and resistance levels don’t really matter on days like today.
He and a few others will be watching Nvidia’s report tonight, and the stock’s subsequent reaction.
Write to Al Root at [email protected]
(tags for translation) Computers/Consumer Electronics
