The recent volatility in markets have sent growth stocks significantly lower and some of the best performing stocks are now trading at compelling valuations. It's leaving a great opportunity for options traders. Nvidia (NVDA) fits this compelling category where lower interest rates, combined with the multiple contraction over the past four weeks, have pulled it back to levels that warrant a potential investment.
Additionally, elevated options premiums can be harnessed for an opportunity to potentially acquire the stock at a valuation that is over 35% lower than where it was at the peak. If we review the chart of NVDA, it recently broke out from a major resistance level at $97 in late May on earnings, and after rallying to its $140 all-time highs, it has pulled back to this support level Tuesday. This presents an attractive risk/reward for a long entry.
The sell-off also has started to show levels of exhaustion where lower lows in price are no longer confirmed by momentum, suggesting a possible trend reversal. Looking at the fundamentals, NVDA trades at a 41times forward earnings, which is a 48% premium to its industry, but is expected to grow EPS and revenues at more than double the pace of its peers. Its margins also stand out as industry leading in the semiconductor space.
This means that the recent multiple contraction provides investors a rare opportunity to buy NVDA at a much more attractive valuation. With options premium on NVDA in its 99% percentile, selling put options provides investors with the opportunity to purchase the stock at a substantial discount to its current price. The trade Looking out to the Sept 6 th (weekly options) $100 Puts collects $7.
05 in premium. Selling this put obligates traders to buy NVDA stock at an effective price of $92.95 if NVDA is below $100 at expiration.
That would translate to buying NVDA at an effective valuation of only 36 times forward earnings, a 35% discount to where the stock was trading just over a month ago. And if NVDA is above $100 at expiration, the yield on your cash for this trade is over 7.5% in just 30 days.
DISCLOSURES: (Owns NVDA) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET.
THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR.
Click here for the full disclaimer..
