Options Activity for NVIDIA Corp. (NVDA)
Thursday, August 12, 2010

I hope that your trading is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.

Semiconductor specialist NVIDIA Corp. (NVDA) has attracted quite a bullish following among options traders heading into the company's fiscal 2011 second-quarter earnings report. For the record, NVDA is slated to enter the earnings confessional after the close of trading on Thursday, Aug. 12, with Wall Street looking for a profit of 11 cents per share. In the same quarter last year, NVDA reported a loss of 19 cents per share. Historically, the company's fundamental performance has been solid, save for the second quarter of fiscal 2010. During the prior four reporting periods, NVDA has bested the consensus estimate three times, but missed Wall Street's view by 13 cents per share in the year-ago quarter.

Options traders are betting big ahead of the company's turn in the earnings limelight, setting their expectations seemingly above the consensus. This preference for call options has only ramped up heading into the company's quarterly report. According to data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE), nearly four calls have been bought to open for every put purchased during the prior two weeks. The resulting 10-day ISE/CBOE call/put volume ratio of 3.77 rests in the 67th percentile of its annual range, meaning that options traders have rarely snatched up NVDA calls over puts at a faster pace.

Checking in with NVDA's open interest configuration, we find that options traders are focusing heavily on the out-of-the-money August 10, 11, and 12 call strikes, where more than 100,000 contracts are currently open. Meanwhile, peak put open interest for the August series of options lies at the in-the-money August 10 strike, totaling 12,141 contracts. This focus on out-of-the-money call options reinforces the idea that NVDA speculators are quite bullish toward the stock.

The bullish sentiment ends at the borders of the options pits, however. Short sellers have loaded up on bearish bets during the past month, with the number of NVDA shares sold short spiking more than 59% during this time frame. As a result, more than 8% of the stock's float is currently sold short, indicating that there is plenty of potential fuel for a short-covering rally in the event of a positive reaction to the company's earnings report.

The analyst community is also firmly entrenched in the bears' camp. Currently, 19 of the 28 analysts following NVDA rate the shares a "hold" or worse, compared to just nine "buys." This dour outlook leaves plenty of room for potential upgrades that could provide lift for NVDA, if the company can wow the brokerage bunch with its fundamental prowess after the close of trading tomorrow.

Unfortunately for NVDA bulls, there is little to cheer about in the stock's recent price action. In fact, the equity has fled south since the start of 2010, dropping more than 54% on a year-to-date basis. The stock's 10-week moving average has helped usher the shares steadily lower during this time frame, and NVDA is now trading below former resistance in the $9-$10 region. This area held the stock in check from October 2008 through March 2009, and could once again provide a stiff level of overhead resistance for any rally attempt by the shares.

The bottom line is that there is plenty sideline money that could spark a sharp rally for NVDA shares. However, the company needs a solid quarterly report in order to convince investors that the stock is worth investing in once again. What's more, this task could prove rather difficult amid growing concerns about global economic growth.

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