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Nvidia (NVDA) has been one of the hottest stocks of the last twelve months, but has since pulled back from 500 to 455. So, what’s next for the stock?
The options market could be indicating that the stock might pull back to around 440 over the next month or so.
This is due to a theory called Max Pain and is something I talked about in a recent video for Barchart.
The Max Pain Theory claims that as option expiration approaches, stock prices will get pushed toward the price at which the greatest number of options in terms of dollar value will expire worthless.
Large institutions are generally net sellers of options, so they will benefit the most from options expiring worthless, or with the lowest net value.
We can use Barchart Excel to find the Max Pain level quickly and easily for any stock and expiration.
Within our Max Pain Excel file, we simply need to input the stock ticker and the expiration date and Barchart Excel will do the rest.
The Excel file then calculates the notional value of all open puts and calls. What we are looking for is the stock price at which the puts and calls have the lowest notional value.
Barchart Excel displays this data in table format and also a graph.
Here we can see that the Max Pain level for NVDA on April 21st is right around 250.
What can we do with this information?
Well, if we think that the Max Pain theory might play out this month, we could look to trade a butterfly spread centred at the 440 strike.
Let’s take a look at how that trade idea might be structured.
NVDA MAX PAIN BUTTERFLY SPREAD
A butterfly spread is constructed by buying a lower strike put, selling two middle strike puts and buying one upper strike put. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long puts less the premium that you paid for the spread.
Using the January 19 expiry, the trade would involve buying the $410 strike put, selling two of the $440 strike puts and buying one of the $470 strike put.
The cost for the trade would be around $640 which is the most the trade could lose. The maximum potential gain is around $2360.
The lower breakeven price is $416.60 and the upper breakeven price is $463.40.
NVDA COMPANY DETAILS
The Barchart Technical Opinion rating is an 80% Buy with a weakest short-term outlook on maintaining the current direction.
NVDA rates as a Strong Buy according to 30 analysts with 3 Moderate Buy and 2 Hold ratings. Implied volatility is 34.44% which gives NVDA an IV Percentile of 3% and an IV Rank of 6.63%
NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU.
Over the years, the company's focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms.
NVIDIA's GPU success can be attributed to its parallel processing capabilities supported by thousands of computing cores, which are necessary to run deep learning algorithms.
The company's GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.
NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role.
The company's partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.
Conclusion And Risk Management
If NVDA broke back above 475, I would consider closing the trade early for a loss.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster 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.
