Options Corner: Nvidia Just Flashed A Rare 'Buy' Signal One Month Ahead Of Earnings

Undeniably, Nvidia Corp (NASDAQ:NVDA) continues to be emblematic of the extraordinary paradigm shift that is artificial intelligence. In the trailing six months, NVDA stock has gained nearly 74%. However, since around early August, the equity has largely stagnated. That might be viewed as a warning by most, but statistically, investors tend to buy the dips. As such, the lull arguably presents an enticing opportunity for bullish contrarians.

Of course, everyone who enters into the trade must be aware of the risks. While Nvidia has had an incredibly strong run of financial results, there are also rising concerns about whether it can keep up this mercurial pace. At some point, the juice may no longer be worth the squeeze — and that could lead to a negative readjustment of the premium attached to NVDA stock.

More fundamentally, Nvidia’s competitors are making noise. In particular, Advanced Micro Devices Inc (NASDAQ:AMD) got Wall Street buzzing with its landmark deal with OpenAI. Granted, there are execution caveats tied to the partnership. Nevertheless, Dan Ives of Wedbush Securities remarked that the market is “still massively underestimating the spending on the AI revolution.”

If so, we can expect the arena to get crowded — and that might again force a readjustment of expectations.

Then again, it’s also possible that the slowdown in NVDA stock is already reflecting these and other headwinds. If so, patient investors may not need to worry as the security has demonstrated an upward bias.

Even better, we can leverage the behavioral tendencies of NVDA stock when under relative pressure to formulate a probabilistically favorable options trade.

Using Data Science To Isolate Behavioral Patterns In NVDA Stock

As mentioned earlier, NVDA stock has an upward bias. Using data from January 2019, the odds that a long position will be profitable 10 weeks out is quite high at 73.4%.  Further, the median price of 10-week returns under baseline or aggregate conditions forms a normal distribution or bell curve.

Assuming an anchor price of $179.83 (Wednesday’s close), most median price outcomes are projected to range between $170 and $212, with the bulk of prices clustering between $190 and $200. Unless you had a truly compelling reason to be bearish during the projected time period, the empirically sound idea would be to consider a bullish strategy.

That said, the market can’t be expected to constantly trade along its mathematical homeostatic trendline. In other words, we know through GARCH (Generalized Auto-Regressive Conditional Heteroskedasticity) studies that near-term volatility has a much more powerful influence on current market behavior than catalysts that materialized a long time ago. What makes NVDA stock so intriguing right now is that its immediate state is under pressure.

Quantitatively through Wednesday’s close, NVDA was structured in a 4-6-D formation: four up weeks, six down weeks, with an overall downward trajectory. Now, there’s nothing special about this sequence. But we can tag this quant signal to understand how NVDA responds to pressure relative to baseline conditions.

You know how scientists tag great white sharks to study their migration patterns? Obviously, ocean waters are massive so without the tagging, scientists would just be guessing (i.e. technical analysis). Well, we’re following the exact same concept, except that we’re tagging market sequences and analyzing their migration patterns relative to their mathematical homeostasis.

Find a positive asymmetry between the conditional pattern and the homeostatic trend and you just might have a favorably mispriced trading opportunity.

That seems to be the case for NVDA stock. When tagging the 4-6-D sequence, we can observe that median prices from 10-week returns are projected to cluster around the $196 level. In other words, the probability of upside remains bullish but the likelihood of a specific magnitude of upside is more reliably frequent.

Go Conservative Or Aggressive?

With Nvidia set to disclose its earnings report on Nov. 19, I would be looking at targeting the Nov. 14 options chain. This way, we can bank on the buy-the-news, sell-the-rumor sentiments, which are arguably more predictable than typical earnings disclosure chaos. With that out of the way, there are two bull call spreads to consider.

The first one is more conservative, which is the 185/190 bull call spread (again, expiring Nov. 14). Currently, the breakeven for this trade lands at $187.20. Should NVDA stock rise through the second-leg strike price ($190) at expiration, the maximum payout stands at over 127%.

The second trade, the 190/195 bull spread, is more aggressive but still reasonable based on expected probabilistic pathways tied to the 4-6-D sequence. If NVDA stock rises through the higher strike price of the pair, the max payout currently clocks in at over 194%. Breakeven is $191.70, though, which is 6.6% above the anchor.

Bottom line, there are always high risks involved when betting on an exceptionally elevated security. However, if you believe in the AI story, Nvidia is giving you a rare buy signal that no one is talking about.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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