(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nvidia Corp. (NVDA) shares continue to soar, with no sign of slowing down. The stock faced a critical moment of truth last week when it approached technical resistance at $219. But after Nvidia said it plans to work with Uber and Volkswagen to develop a chip to aid in autonomous driving, its shares went smashing through resistance. (See more: Nvidia Partners With Uber, VW on Self-Driving Cars.)
Taking advantage of the technical breakout, options traders are betting the stock could rise nearly 15 percent from its current price around $225. (See also: Nvidia's Stock Faces Its Moment of Truth.)
Shares of Nvidia on a short-term basis appear poised to rise as positive momentum continues to build. But should Nvidia trade up to nearly $255, it would be valued at almost 42 times fiscal 2020 analysts' earnings estimates. That would stretch an already-rich premium, which is three times more expensive than recently troubled chipmaking peer Intel Corp. (INTC). (See also: Nvidia Could Fall 60% After Bubble Bursts.)
The Moment Of Truth
The chart above shows how Nvidia ripped through resistance at $219 as if it wasn't even there.
But it is worth noting that the relative strength index (RSI) is in overbought territory, with a reading at nearly 73. An RSI reading over 70 is considered to be overbought.
The $220 strike price long straddle options strategy set to expire on March 16 is pricing in a rise or fall of 13 percent, putting the stock in a trading range of roughly $195 to $253. But the calls are favored by nearly 10 to 1 over the puts, giving the options a bullish favoring.
But even more impressive is the open interest that lies at the $250 strike price, with an open interest of nearly 5,700 contracts, trading at roughly $6 per contract. This means Nvidia stock would need to rise to over $256 just to break even, an increase of nearly 15 percent.
Implied volatility is high in Nvidia, at nearly 40 percent, versus an S&P 500 that's at 8.5 percent. This means Nvidia could be subject to significant price swings in the near future. But for now, the call options outweigh the number of puts for the strike prices ranges from $210 to $250, which suggests options traders are looking for shares to continue to rise.
But Nvidia will still need to work on continuing to grow revenue and earnings at a pace to support valuation. And while technicals and options betting can move stocks in the short term, strong long-term performance always comes back to the fundamentals.
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.