(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nvidia Corp. (NVDA) shares continue to dazzle, and even diehard bears must be feeling discouraged by the company's last round of spectacular financial results. Traders are betting that Nvidia's astronomical rise will continue based on options trading, which suggests the stock could surge another 12 percent.
The expectations for Nvidia are climbing, as the chipmaker continues to post results that seem to get better with every quarter, making even skeptics start to believe. (See also: Why Nvidia's Stock Faces A Growth Crisis.)
The options set to expire on January 19, 2018, suggest more gains are ahead, with traders buying calls betting that Nvidia's stock price will rise. The long straddle options strategy using the $215 strike price suggest that shares could rise or fall by nearly 12.5 percent from their current stock price of around $214.
That would give the stock a trading range of roughly $189 to $241, a huge spread for sure. But the call activity is easily outpacing the activity in the puts, suggesting traders are looking for shares to rise by the time January rolls around.
One of the most active call options for expiration in January is the $250 strike price, with nearly 850 contracts trading, at roughly $2.80.
That would mean shares of Nvidia would need to rise to a price of $253 just for the options to be at breakeven, an increase of 18 percent. These bets are not just being placed today; the open interest already stood at 4,700 contracts.
Keep in mind that Nvidia shares are already up 101 percent year to date, and 985 percent over the past three years. And it seems traders are looking for even more gains over the next couple of months.
The bullishness in the stock is overwhelming and hard to dispute given the company's ability to post robust revenue and earnings growth quarter after quarter.
High Levels of Volatility
The implied volatility in the options are still very high, even post-earnings results. It currently stands at 35 percent, which is about 3.5 times greater than the S&P 500 Index's implied volatility of 9.9 percent. The high implied volatility makes the premium to buy the calls more expensive. And should volatility fall, the value of the options would fall as well.
For now, investors and traders are all bulled up on shares of Nvidia. Given the company's last round of financial results, even the skeptics have to be impressed.
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.