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Nvidia Inc (NVDA) stock is still cheap, as analysts have higher price targets. Moreover, investors can make extra income shorting out-of-the-money put options - 2%+ yields are available at 5% OTM strike prices over 3 weeks.
NVDA stock is at $117.17 in morning trading on Monday, Sept. 16. This is up from recent lows below $100 per share in early August and another recent low of $102.83 on Sept. 6.
This article will discuss why it makes sense now to sell short out-of-the-money put options, especially for existing shareholders.
Target Prices Higher
Nevertheless, analysts still have much higher price targets. For example, Yahoo! Finance reports that the average price target of 50 analysts is $145.22 per share. Barchart's survey shows a similar high price target with a mean of $149.22.
Moreover, AnaChart.com, a sell-side analyst stock recommendation tracking site, reports that 38 analysts who've recently written on NVDA stock have an average target of $148.49. That represents an upside of over 26% from today's price.
These are 12-month price targets. It may take some time and future quarterly reports of exceptional earnings and cash flow for the price target to be hit. As a result, it makes sense for existing shareholders to sell short out-of-the-money put options—that way they can make extra income with potentially lower buy-in price targets.
Shorting OTM Puts
I discussed doing this kind of trade in my last Barchart article on Aug. 13, “Shorting Out-of-the-Money Nvidia Puts Is Working - 2%+ Yields Over 3 Weeks.” The stock was at $114.33 on Aug. 13 and I suggested shorting the $105.00 put options that were to expire on Aug. 30. The premium received was $3.50 for a put contract that was over 8.5% below the stock price.
As it turned out, NVDA closed at $119.37 on Aug. 30, and the investors made an income of 3.33% over 3 weeks (i.e., $3.50/$105.00). And investors who also held NVDA shares made a 4.44% unrealized capital gain.
This kind of trade can now be repeated. For example, look at the Oct. 4 expiration period. It shows that the $109 strike price put contract has a premium of $2.28 per contract. That brings an immediate yield of 2.09% to the short seller of these puts (i.e., $2.28/$109.00).
This is for a strike price over 7.5% below today's spot price for NVDA. In other words, the investor who secures $10,900 in cash with their brokerage firm can make $228 in immediate income per put contract sold short.
Moreover, even if the stock falls to $109, the investor's breakeven price, given the income already received, is $109-$2.28, or $106.72. That's about $10 below today's price, or 8.56% out-of-the-money (i.e., $106.72/$116.72-1).
This looks like a very good trade for most investors, especially those looking to buy into NVDA stock should it fall again. It is also a way for existing investors to make extra income while they wait for the stock to rise.
For example, if this trade can be repeated every three weeks for a quarter, the expected return (ER) is $228 x 4, or $912. That works out to an ER yield of 8.37% (i.e., $912/$10,900), assuming the same put yield can be made each time.
The bottom line is that NVDA looks cheap here and this short-put play is one way to take advantage of the stock's volatility and higher price targets.
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.
