Recent market volatility has driven growth stocks down significantly, with some of the best performing names trading at attractive valuations. This presents a great opportunity for options traders. Nvidia (NVDA) falls into this attractive category, where low interest rates, combined with a contraction in multiples over the past four weeks, have pulled it back to levels that justify a potential investment. Furthermore, by taking advantage of rising option premiums, you could potentially acquire the stock at a valuation 35% or more lower than the peak. Looking at the chart for NVDA, it recently broke out of a key resistance level of $97 on earnings in late May and rallied to an all-time high of $140 before pulling back to this support level on Tuesday. This represents an attractive risk/reward for a long entry. Also, the selling pressure is starting to show a level of exhaustion where price lows are no longer confirmed by momentum, suggesting a possible trend reversal. Looking at fundamentals, NVDA trades at 41 times forward earnings, 48% higher than its peers, but EPS and revenue are expected to grow at more than twice the pace of its peers. The company also has industry-leading profit margins in the semiconductor space. This means that the recent multiple compression presents a rare opportunity for investors to buy NVDA at a much more attractive valuation. NVDA’s option premium is in the 99th percentile, so by selling put options, investors can get the opportunity to buy the stock at a significant discount to the current price. A trade targeting a $100 put option on September 6 (weekly options) earned $7.05 in premium. By selling this put option, traders would have to buy NVDA shares at an effective price of $92.95 if NVDA was below $100 at expiration. That means you’re buying NVDA at an effective valuation of just 36 times projected earnings, a 35% discount to where the stock was a little over a month ago. And if NVDA is above $100 at maturity, the cash yield on this deal will be over 7.5% in just 30 days. Disclosure: All opinions expressed by CNBC Pro contributors (who own NVDA) are theirs alone and do not reflect the opinions of CNBC, NBCUniversal, its parent or affiliated companies, and may have been previously distributed by them on television, radio, the Internet or other mediums. The above content is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax or legal advice, or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect any individual’s unique circumstances. The above content may not be suitable for your particular situation. You should strongly consider seeking advice from your own financial or investment advisor before making any financial decisions. Click here for the full disclaimer.
You could use options to profit from Nvidia’s volatility and buy the stock cheap.
By NvidiaDaily
