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NVIDIA Option Players Hope for a Long-Term Rebound

Option players are honing in on NVDA's March 11-strike call today

by 11/16/2012 1:02 PM
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Call volume is outpacing put volume on NVIDIA Corporation (NASDAQ:NVDA - 11.38) in today's session. At last check, roughly 7,300 calls have crossed the tape, compared to around 5,600 puts. Traders have set their long-term bullish sights on NVDA's March 11-strike call, which has seen more than 2,000 contracts trade. The majority of these have crossed at the ask price, implied volatility has ticked higher, and just 340 contracts currently make up open interest here, hinting at new buy-to-open activity.

By initiating these long calls, traders will begin to profit with each step north of $12.22 (the strike plus the volume-weighted average price of $1.22) NVDA takes through March expiration. This represents a 7.4% premium to current levels.

Broadening the scope, today's preference for calls supports the sentiment displayed by options players at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in recent weeks. Specifically, over the course of the past 20 sessions, speculators have bought to open 166 calls for every 100 puts.

Echoing this trend is NVDA's Schaeffer's put/call open interest ratio (SOIR) of 0.42. Not only does this show that call open interest more than doubles put open interest among options expiring in three months' time, but it ranks in the 41st percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward the stock.

The optimism toward NVDA is evident outside of the options arena, as well. Among the brokerage bunch, the consensus 12-month price target of $15.81 represents a 39% premium to NVDA's current price. Plus, a slim 2.3% of the equity's float is sold short, and it would take fewer than two days to cover these shorted shares, at the security's average daily pace of trading.

The glass-half-full approach on Wall Street is a bit puzzling given NVDA's technical backdrop. In addition to lagging the broader S&P 500 Index (SPX) by nearly 17 percentage points over the past 60 sessions, the shares have lost almost 19% of their value in 2012. What's more, the equity recently ran headlong into resistance at its 40-day moving average, and wallowed its way down to a two-year low of $11.15 in today's session.

From a contrarian perspective, the lofty levels of bullish sentiment surrounding this underperforming stock certainly have bearish implications. In fact, the equity has lost 10% of its value since getting hit with a wave of downgrades and price-target cuts last Friday. Further capitulation from this sanguine group could apply additional selling pressure on NVDA.

At last check, the stock has surrendered 1.9% in today's session to hover near $11.38.


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