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Nvidia Inc (NVDA) stock is clearly on a tear, up over 198% YTD and even 12.8% this month as of June 16 when it closed at $426.92. On May 31, it was at $378.34, but as I pointed out in an earlier article on May 30, options premiums were heavily skewed to the call side. That showed investors were still heavily bullish on the NVDA stock.
That article, “Nvidia Stock Surges - The Ultimate FOMO Stock, Pushing Its Call Option Premiums Sky High,” indicated huge optimism in the stock. However, now it makes sense to begin to short out-of-the-money (OTM) puts, in case NVDA stock begins to pull back. This is also a good way to take advantage of huge put option premiums to create extra income.
After analysts' target prices are still significantly over today's price.
Analysts' Target Prices Could Imply NVDA Stock Has Yet to Peak
Analysts have been consistently bullish on NVDA stock in the past several months. Yahoo! Finance, using data from Morningstar and other sites, indicates that 13 out of 48 analysts surveyed in May had a strong buy on the stock. In June 7 out of 38 analysts still have a strong buy recommendation.
In addition, the average of 40 analysts' target prices is $464.75, according to Yahoo! Finance. That is still $37,83 per share or 8.86% over today's price (as of Friday, June 16) of $426.92.
Fueling this higher price target is an outlook for significantly higher earnings per share (EPS) growth. For example, Seeking Alpha reports that the average of 43 analysts' EPS forecast for Dec. 24 is $9.76. That represents an EPS growth rate of 25.6% over the $7.77 EPS average forecast for 2023.
Moreover, that 2024 EPS forecast puts NVDA stock on a reasonable multiple of just 43.8x. This is on par with the stock's 5-year average forward P/E multiple of 43.5x. That implies that the stock is still not overvalued based on analysts' estimates of earnings and its historical multiples.
One way to conservatively take advantage of this is to short out-of-the-money (OTM) puts, which have relatively high premiums.
Shorting OTM NVDA Puts
For example, the three weeks out expiration period of July 7, 2023, shows that the $400 strike price puts trade for $6.48 per $400 strike put. That is very attractive since the strike price is over 6.3% below today's spot price of $426.92, and the premium provides an immediate yield of 1.62%.
This can be seen by dividing the premium of $6.48 by the strike price of $400.00. For example, if an investor secures $40,000 (i.e., 100 shares x $400) with a brokerage firm in cash and/or margin, they can then enter an order to “Sell to Open” 1 put contract at $400 for expiration on July 7. The account will immediately receive $648, which thus represents 1.62% of the $40,000 invested.
Moreover, if this trade can be repeated every three weeks for the next year, the annualized return works out to 28% (i.e., 1.62% x 17.333 - since there are 17.333 periods of 3 weeks in a year). That shows that this short put trade is profitable for the long term as the OTM NVDA stock put premiums are relatively high.
For investors who want to make a more conservative trade, they can short the $390 strike price puts, which is over 8% below today's spot price. This strike price offers a premium of $4.05 per put. That represents an immediate yield of 1.03% (i.e., $4.05/$390), which is an attractive return for the long term.
The bottom line is that analysts' target prices and forward EPS estimates imply NVDA stock could still rise from here. That makes it a good time to begin shorting OTM puts for both income and also the ability to automatically buy the stock at lower prices if the stock pulls back.
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.
