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Nvidia Inc. (NVDA) stock is floating higher as analysts keep raising their price targets and revenue forecasts. Put option premiums are sky-high, giving short sellers high yields in out-of-the-money put strike prices in close expirations.
NVDA is at $139.26 in midday trading on Tuesday, Nov. 5. I wrote about this opportunity in my Oct. 8 Barchart article, “Nvidia Stock Is Still Cheap Based on Analysts' Targets - Short Put Plays Are Attractive.”
Since then, analysts surveyed by Yahoo! Finance have raised their price targets from $148.13 per share to $148.87. Before that article, the average was $145.22. Similarly, AnaChart reports that the average of 39 sell-side analysts is now $164.87, up from $157.11 shown in my prior article.
This implies that NVDA stock still has an 18%+ upside to reach the average price target.
Free Cash Flow Targets
More importantly, these analysts have been raising their 2025 revenue forecasts. That has huge implications for Nvidia's expected free cash flow (FCF) generation.
For example, analysts now project $177.89 billion in sales next year (up from $176.70 billion), or 40.6%+ over $125.66 billion in revenue forecast for 2024. I pointed out in my Aug. 30 Barchart article that Nvidia's Q2 free cash flow (FCF) margin was 45%.
As a result, using this margin estimate for 2025, it's possible Nvidia could produce $80 billion in free cash flow (FCF) next year. That is an astounding amount of FCF. For example, in the last 12 months to July 31, Nvidia generated just $46.786 billion in FCF. So next year it could produce over 70% more FCF.
As a result, NVDA could move substantially higher. For example, using a 2.0% FCF yield (i.e., 50x FCF), Nvidia could eventually have a $4 trillion market cap (i.e., $80b/0.02 = $4,000 billion).
That is 17.2% higher than its present $3.412 trillion market cap. In other words, NVDA stock could be worth +17.2% more than $139.26, or $163.21 per share. That is slightly higher than my previous $162.11 price target - all based on analysts' higher revenue targets.
However, what is the stock falters after earnings come out? What should the investor do now?
Shorting OTM Puts
One way to play this is to take advantage of the extremely high put option prices. That way the investor can get paid while waiting for the stock to fall to a lower strike price - i.e., an out-of-the-money (OTM) but-in price.
For example, look at the Nov. 22 option expiration period, 17 days from and shortly after the expected Q3 Nov. 20 earnings release date. It shows that the $130 put option strike price has an attractive $4.00 premium. This potential buy-in price (if the stock falls) to the short-seller is over 6% below today's trading price.
It also implies that the short seller of these puts can make an immediate yield of 3.077% (i.e., $4.00/$130.00 = 0.030769). That is a very high yield for just over a 2 week investment period.
Here is how that works. An investor in this play would first secure $13,000 in cash or buying power with their brokerage firm. Then they can enter a trade to “Sell to Open” 1 put contract at $130.00. The $13k acts as collateral in case NVDA falls to $130 on or before Nov. 22.
The account will then immediately receive $400 (i.e., $4.00 x 100 shares per put contract). That works out to over 3.07% for just two weeks. Moreover, if the investor can repeat this every 2 weeks for the next quarter, the expected return (ER) is 22.62% (i.e., 3.077% x 6x). Not a bad return.
This implies that if NVDA stays flat for the next 12 weeks, the short-put investor can make well over 20% just short deep OTM puts in nearby expiry periods. That is one way to profitably play the NVDA stock opportunity.
For example, in my two articles on NVDA, I suggested shorting OTM puts in close expiry periods. All of these have turned out profitably and the investor would have made money shorted these puts.
Moreover, even if NVDA does fall to $130, the investor has a much lower breakeven price. For example, $130-$4.00 in income already received, sets that breakeven at $126.00, or 9.58% below today's price. That is why this is such a good way to set a buy-in target price.
The bottom line is that NVDA continues to look undervalued here. One way to play this is to short OTM put options in nearby expiry periods.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
