Options Update: Is Nvidia a One-Hit Earnings Wonder?
Nvidia’s Earnings Edge Out Lowered Expectations
Ahead of the open this morning, beleaguered computer-graphics semiconductor concern Nvidia
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stepped up to release its quarterly earnings report. For the period, NVDA reported adjusted second-quarter earnings of 13 cents per share on revenue that fell 5% to $892.7 million. Wall Street was expecting a second-quarter profit of 12 cents per share on sales of $908.4 million. It should be noted, however, that NVDA’s revenue fell near the mid-point of its already lowered guidance for sales of $875 million to $950 million. The company had previously expected revenue of $1.1 billion for the second quarter.
But the investor celebration of the report was marred by another round of one-upmanship by rival graphics-chip maker Advanced Micro Devices
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PowerRating). According to a report in The Wall Street Journal, AMD “announced a new graphics card Tuesday that some reviewers are calling the most powerful on the market.” Underscoring the potential blow to NVDA’s already shaky bottom line, Dan Olds, an analyst at Gabriel Consulting Group, stated that “The payoff is that this puts AMD in the enviable position of having both the highest-performance video card and the less-expensive solution,” he said.
Call Volume Spikes on Earnings Reaction
Despite the increased competition, investors are focusing on NVDA’s earnings report, sending the stock more than 8% higher in today’s trading. The stock’s jump has prompted quite a bit of activity in the options pits, with both calls and puts arriving on today’s Intraday Volume Explosion List. It was this combination of heavy call and put volume that caught my eyetoday.
Diving into the activity, volume for both calls and puts has more than quadrupled NVDA’s daily averages. On the call side, some 22,500 contracts have changed hands today, with most of the attention being paid to the front-month August 12.50 strike. More than 9,400 calls have traded at the August 12.50 strike, with much of the activity crossing the tape at the ask price – suggesting that these option are being bought to open. In my opinion, this is highly speculative activity, as August options expire at the end of the week, and these traders need NVDA to rally above 12.50 in less than 3 trading sessions. The stock is currently hovering closer to $12 per share, at last check.
On the put side, nearly 10,000 of these bearishly oriented options have traded, with the heaviest volume crossing at the out-of-the-money September 10 strike. Nearly 5,000 contracts have traded on the September 10 put, with the majority of the activity trading at the bid – suggesting that these options were sold. Unless they were sold to open (i.e. the initiation of a put-sell position), it would suggest that weaker bearish hands are being shaken out by today’s earnings-induced surge in the underlying shares.
Excessive Bullish Sentiment Could Limit Upside
Today’s preference for calls over puts stands in stark contrast to yesterday’s surge in put trading. Near-term put open interest jumped by 3.5% overnight, prompting the stock’s Schaeffer’s put/call open interest ratio (SOIR) to spike to a reading of 0.46, in the 25th percentile, from yesterday’s reading of 0.35, in the 5th percentile. It would seem that speculative investors were anticipating a negative reaction to NVDA’s earnings report. These lowered expectations ahead of the event could account for the sharp spike of nearly 12% in the shares on the open.
With the initial shock out of the way, it’s time to bring the situation back to earth for NVDA. The surge in put activity ahead of the event is once again giving way to excessive optimistic sentiment, as evidenced by the heavy attention to front-month call options in today’s trading. Furthermore, the stock’s SOIR indicates that options traders have been more bullish toward the shares only a quarter of the time during the past year.
What’s more, the August 12.50 strike is home to peak front-month call open interest, and could create considerable options-related resistance for NVDA heading into Friday. Some 22,000 contracts reside at this front-month call, and the picture doesn’t improve much as September options roll into the picture. (For September, there are roughly 26,000 calls open at the 12.50 strike.)
Technically Speaking
Turning to the technical picture, we find a stock that has been in freefall mode for quite some time. Since setting an all-time high of 39.67 in October 2007, the shares of the Forbes 2007 “Company of the Year” have plunged more than 69%. Following a sharp drop in early July due to a warning that second-quarter earnings would arrive well below prior expectations, NVDA has consolidated into short-term support at the 10.50-11 region. However, the stock’s upside has been severely limited by staunch resistance in the 12-12.50 region. While the equity has topped the 12 level in today’s trading, NVDA’s intraday high of $12.44 per share indicates that the 12.50 level may be too tall an order for the security.
The Verdict?
NVDA appears to be a 1-day-wonder, as traders overreact to basically in-line earnings that were drastically lowered in early July. The culprit for today’s surge is likely the excessive negativity in the options pits heading into the event. Once the shock to these speculators has worn off, I would expect to see the shares continue to struggle under resistance at the 12.50 level. In fact, a close below the 12 level by the end of the week wouldn’t surprise me at all. There is still too much optimism levied against the security from both options traders and Wall Street for my taste. What’s more, attempting to call a bottom for the shares in the current economic climate (especially when AMD just trumped the company in the graphics-processor race) would be tantamount to catching a falling knife; even if you successfully time the trade, its still bound to leave a mark.
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