Nvidia: Tails We Lose

That One Didn't Work...

In yesterday's post ("How We're Playing Nvidia Ahead Of Earnings Today"), I wrote that we had about coinflip odds of our Nvidia (NVDA) earnings trade working out: 

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.

Nvidia reported monster numbers, beating top and bottom line estimates, but not Wall Street's higher whisper numbers. 

And the company's conference call apparently didn't give analysts enough color on the rollout of the company's Blackwell chips. So unlike last quarter, when our coinflip earnings trade on Nvidia came up heads, and we made 215%, this morning we exited our Nvidia trade for a net credit of 2 cents, so we lost 94% on it. 

...But This One Did

In yesterday's post, I mentioned a way to get better-than-coinflip odds on these kinds of earnings trades: 

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. 

It didn't think to mention it there, but it turns out we had an open earnings trade where we did just that. Back in June, we placed a bullish trade on Salesforce (CRM) when it was down 15% from a slight revenue miss. 

As I wrote there, 

Our options trade today is a bet that this stock will erase half of its current 15% post-earnings drop after it releases earnings next quarter. If we’re wrong, our maximum loss on this trade will be 100%, and if we’re right, our maximum gain will be about 200% [...]

The company is Salesforce (CRM 0.00%↑), and the trade is a vertical spread expiring on September 20th, buying the $240 strike calls and selling the $250 strike calls for a net debit of $3.30. 

Salesforce reported its earnings after the close yesterday, and beat on both top and bottom lines.

Since expectations weren't as high for it as they were for Nvidia, the stock reacted positively after hours. I exited that trade this morning at a net credit of $8.79, for a gain of 166% (rather than holding out until September 20th for a shot at a 200% gain on this one). 

Looking For The Next Salesforce 

One thing I'm doing during this earnings season is looking for a similar set-up as Salesforce last time: a fundamentally strong company punished after generally strong earnings. In doing so, I'll follow the same gameplan I used with Salesforce: 

1. We didn’t bet on it right after earnings, which were last month. We waited for prices to consolidate a bit. We’re not getting in at the post-earnings bottom, but the stock is still down about 15% from were it was pre-earnings. And we know now that its post-earnings plunge wasn’t the start of an extended slide, as with LULU and SNOW.

2. We paid attention to valuation. This stock had an overall valuation rating of 4 pre-earnings, according to Chartmill, and after that drop it has an overall valuation rating of 6. Its other fundamentals are strong too: a profitability rating of 8, a health rating of 7, a growth rating of 8 (all on a scale of 0-10), and a Piotroski F-Score of 9 (on a scale of 0-9).

3. We waited to get the options prices we wanted, placing a limit order that took over a week to fill.

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