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NVIDIA Bulls Count on a Post-Earnings Surge

NVDA weekly call volume spikes on earnings' eve

by 11/7/2012 2:03 PM
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As NVIDIA Corporation (NASDAQ:NVDA - 12.63) prepares to report quarterly earnings after tomorrow's close, the stock has shed about 3% in intraday action. The decline may have been triggered by the security's price-target cut to $17 from $20 at Wedbush Securities earlier in the session, compounded with overall selling pressure across the market. Nevertheless, bullish options activity is running hotter than usual on NVDA today, with roughly 8,300 calls crossing the tape so far. This is 44% above the norm, and nearly four times the number of puts exchanged.

One of the most-active options has been the weekly 14 strike, where more than 1,500 calls have changed hands -- most of them at the ask price, pointing to buyer-driven activity. These out-of-the-money contracts traded at a volume-weighted average price of $0.11 each. Today's volume exceeds current open interest levels, while implied volatility has jumped more than 35 percentage points during the course of the session -- both of which underscore our theory of new positions. In order for traders to secure a profit from these bought-to-open calls at expiration, the stock must trek north of $14.11 (strike price plus VWAP) by Friday's close.

This preference for calls over puts is simply business as usual for NVDA. In fact, calls bought to open have more than doubled puts during the past month, per the stock's 20-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.09. Likewise, the security's Schaeffer's put/call open interest ratio (SOIR) sits at 0.43, confirming near-term calls outpace puts by a margin of more than two to one. This ratio ranks in the 44th annual percentile, indicating short-term traders are slightly more bullishly aligned toward the equity than usual.

However, the sentiment scales among the brokerage bunch are bearishly tipped. Just ten analysts have handed out "buy" or better ratings to NVDA, versus 19 tepid "holds" and one "strong sell" suggestion. This cautious attitude toward the graphics chip maker isn't surprising, considering the equity's year-over-year decline of nearly 14%, as well as its year-to-date loss of nearly 9%. What's more, the security is on pace to finish yet another week below its 10-week moving average, which has served as resistance since early September.

As previously noted, NVDA is on deck to reveal fiscal third-earnings after tomorrow's closing bell, and has surpassed consensus bottom-line estimates in each of the past four quarters. Although today's call activity flies in the face of the stock's lackluster technical performance, the aforementioned weekly bulls are likely hoping for another upbeat earnings surprise, which could push the equity higher prior to expiration this Friday. Following the firm's last earnings report the evening of Aug. 9, the stock jumped higher out of the gate, only to pare these gains and end slightly lower on the day.


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