Nvidia's Soaring Stock Is Leaving S&P 500 In The Dust

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Nvidia Corp.'s (NVDA) rebound has dramatically outpaced the market in recent days, and the bulls just keep getting even more bullish. The options traders in Nvidia stock appear to have nerves of steel.

In a February 5 Investopedia article, we noted that options indicated the stock would rise to $250, just as the stock was plunging. Now, those same options are looking for a rise to $300, a gain of another 20 percent. (See more: Nvidia Options Traders Bet Big On Chipmaker As Stock Drops.)

Shares of Nvidia fell from an intraday high of $249 on January 31, to an intraday low of $204 on February 6. That's a decline of 18 percent as anxiety among investors soared during a broader market sell-off. But the options traders were undeterred at the time. Now, these same traders are betting shares of Nvidia will surge another 20 percent, to about $300. (See also: The Investopedia Anxiety Index Explained.)

Big Price Swings

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The options set to expire on June 15 are pricing in another rise in the stock, with the call options overwhelmingly outweighing the puts by a ratio of nearly 3 to 1, at the $250 strike. The long straddle options strategy suggest the stock price could rise or fall by 20 percent, placing NVID stock in a trading range of $200 to $300. That's a $100 spread, which is absolutely massive.

Bullish Bets

The bets on the calls are overwhelmingly bullish, it carries a significant notional value, at approximately $10 million, a substantial wager for a stock with so much volatility being priced into currently. Additionally, at the $300 strike price, there are nearly 4,000 contracts of open interest as well and have a value of about $3.5 million. The stock would need to rise to almost $309 just for the options to breakeven. 

Bears Linger

The bets on the calls are overwhelmingly bullish and carry a significant notional value, at approximately $10 million. That's a substantial wager for a stock with so much volatility being priced into currently. 

Additionally, at the $300 strike price, there are nearly 4,000 contracts of open interest with a value of about $3.5 million. Nvidia stock would need to rise to almost $309 just for the options to break even. 

The bullishness should not come as a surprise given Nvidia's robust fourth-quarter results. The company reported 4Q revenue that was nearly 9 percent better than expected, and earnings that were almost 30 percent better than expected.

Analysts are now looking for the company to grow revenue in 2019 by nearly 28 percent, and earnings to increase by nearly 40 percent. The significant growth numbers have brought down the company's forward earnings multiple to 32 times 2020 estimates, according to data from YCharts. 

The big question that remains for Nvidia is how long the growth can continue at this pace. Analysts are looking for revenue growth to slow to 13 percent in 2020, while earnings are expected to slow to 12 percent. (See also: Stock Strategies for a Highly Volatile Market.)

Those who doubted Nvidia's ability to grow have been embarrassed over and over again, while loyal stalwarts have been richly rewarded. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.