Signal Says Don't Sweat Semiconductor Stock's Pullback

NVDA options are affordably priced at the moment, too

Deputy Editor
Oct 26, 2020 at 2:26 PM
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Semiconductor name Nvidia Corporation (NASDAQ:NVDA) is almost two months removed from its Sept. 2 all-time high of $589.07. That's impressive when you consider the equity bottomed out at $180.68 during the broader market's mid-March pullback. So should investors be worried that a 3% loss for the month of October, set to be its first monthly loss since March? If past is precedent, no, as this slide brings the stock back within a historically bullish trendline.

More specifically, Nvidia stock is within one standard deviation of its 40-day moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, NVDA has tested support at this trendline six other times over the past three years. The stock was higher a month later 67% of the time, and averaged a 4.1% gain for that time period. A move of similar magnitude from NAV's current perch of $526.90 would put the equity at $548.50 -- and nearly erasing the October and quarterly deficit.

NVDA Chart October 26

In the options pits, there's a increasingly strong appetite for puts at the moment. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows Nvidia stock with a 50-day put/call volume ratio of 0.77, which ranks higher than 93% of readings in its annual range.

What's more, options traders are pricing in relatively low volatility expectations at the moment, per NVDA's Schaeffer's Volatility Index (SVI) of 52%, which sits in the 27th percentile of all other annual readings -- a boon for premium buyers. Plus, the equity's Schaeffer's Volatility Scorecard (SVS) sits at a relatively high 79 out of 100. This means the stock has greatly exceeded option traders' volatility expectations during the past year -- a boon for options buyers.

 

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