Trading Nvidia Ahead Of Earnings
In yesterday's ZeroHedge post ("America In 'Late Stage Imperial Decline'"), I mentioned my subscribers and I had three trades teed up for Tuesday:
I am optimistic about three trades teed up for later today (these are all current Portfolio Armor top names; our top names have returned 21.22%, on average, over the next six months, since December of 2022):
A mega cap releasing earnings this week. This stock has excellent fundamentals (Chartmill gives it an 8 out of 10) and technicals (10 out of 10). Zacks is slightly less bullish about its earnings than Wall Street, but Estimize is more bullish than Wall Street, as it has been over the last four quarters. In each of those four quarters, the company’s actual earnings have been higher than Estimize’s estimate. This one seems like a coin flip to me, but with our trade, our potential upside will be 2x our potential downside.
A midcap with excellent technicals (10 out of 10) and middling fundamentals (5 out of 10).
A small cap with middling technicals (5 out of 10) and fundamentals (5 out of 10), but a valuation rating of 8 out of 10, because it’s trading at less than 0.8x tangible book value. This is the most interesting of the three to me, because it’s very rare that a company trading below book value ends up in our top ten.
My subscribers and I have bullish options trades teed up on all three, with expirations ranging from the end of this week for the first one, to several months out for the third one.
You have probably guessed by now that the mega cap I alluded to in the first trade was Nvidia (NVDA). Here's how we're playing it.
Slightly Better Than Coin Flip Odds
Everyone expects Nvidia to report monster numbers; the question, as always, is whether the numbers will be large enough relative to Wall Street's expectations. In yesterday's post, I mentioned Estimize is more bullish than Wall Street, but they're not quite as bullish as JP Morgan's whisper number mentioned in ZeroHedge's Nvida earnings preview. The general sense I get from that post and other data is there are slightly better than 50% odds of an Nvidia beat today.
ZeroHedge's post mentions that market makers see a possible movement of about 9.4% in either direction post-earnings. Going by the at-the-market straddle expiring on Friday, the options market expects a movement of about 10.7% in either direction.
Using the more conservative 9.4% figure, NVDA shares could hit $140 if the company beats earnings after the close. For the maximum gain on our trade, we need NVDA to hit $133 by the end of the week.
Heads We Make 200%, Tails We Lose 100%
If your odds of success on a trade are about 50%, you need to make more than 100% on trades you get right to profit consistently from that kind of trade. Our Nvidia earnings trade is structured to do that. We opened a vertical spread expiring on August 30th, buying the $132 strike calls, and selling the $133 strike calls for a net debit of $0.33 per contract.
The worst case scenario here is that NVDA never trades above $132 after earnings. In that case, our spread will most likely expire worthless, and we'll lose 100% of our $0.33 per contract.
The best case scenario is that NVDA trades well above $133 after earnings, and we exit our spread for a net credit of close to $1. If we exit at $1, that would be a 203% gain from the $0.33 we paid per contract.
How This Approach Worked Last Quarter
We used a similar approach last quarter, when Nvidia was also our #1 name.
In that case, our vertical spread was buying the $990 call and selling the $1,000 call for a net debit of $3. We exited that spread the day after Nvidia reported at $9.45, for a 215% gain.
If it turns out we guessed wrong this quarter, and we lose 100% on this trade, our average gain over this quarter and last quarter will be [(215% - 100%) / 2] = 57.5%.
Tilting The Odds In Your Favor
A way to tilt the odds in your favor on this kind of trade is to place it earlier, during a pullback in the stock. We are looking to do that now, for stocks reporting next quarter. If you would like a heads up when we place one of those trades, feel free to subscribe to our trading Substack/occasional email list below.
And if you just want to limit your risk now, you can download the Portfolio Armor hedging app here, or by aiming your iPhone camera at the QR code below.
If you'd like to stay in touch
You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).
