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Bulls Bet on NVIDIA (NVDA) to Break Free of Its Trading Range

NVDA's March 13 calls were bought to open on Thursday

by 2/15/2013 10:02 AM
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Call players circled around NVIDIA Corporation (NASDAQ:NVDA - 12.70) on Thursday, despite the bevy of bearish brokerage notes that were levied toward the stock. Around 65,000 contracts crossed the tape, representing more than four times the average daily volume for call options. NVDA's March 13 call emerged as the most active strike on the day, where more than 16,500 contracts traded. The majority of these went off at the ask price, and open interest rose overnight, pointing to buy-to-open activity.

By purchasing these out-of-the-money calls for a volume-weighted average price (VWAP) of $0.24, traders expect NVDA to land above $13.24 (strike plus VWAP) by the close on Friday, March 15 -- when the soon-to-be front-month options expire. This breakeven mark represents a 4.3% premium to the stock's current perch. At yesterday's close, delta for this option was docked at 0.40, or 40%. In other words, the options market is giving these calls a 2-in-5 chance of being in the money at expiration.

From a wider sentiment standpoint, NVDA calls have been in order among short-term speculators, per the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.32. Not only does this show that call open interest more than triples put open interest among options expiring in three months or less, but it ranks in the 15th percentile of its annual range. Simply put, near-term traders are more call-heavy than usual toward NVDA.

Technically, NVDA has been sticking close to the $12-$13 range since mid-December, while on a year-to-date basis, the stock has added a modest 3.8%. The equity enjoyed a burst of positive price action yesterday, though, as investors turned a blind eye to the chip maker's downwardly revised fiscal first-quarter revenue outlook. The forecast prompted a slew of price-target cuts from the likes of Nomura and Stifel Nicolaus, but the stock still managed to add 2.9% on the day.

This upward momentum has stalled in today's session, however, and the stock was last seen 0.2% lower. Should NVDA fail to topple $13.24 by March expiration, the most Thursday's call buyers stand to lose is the premium paid at initiation.


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