Since the release of Nvidia's (NASDAQ:NVDA) Q2 earnings report on August 23, the company's stock has managed to maintain a relatively stable position. As of Friday, August 25, Nvidia stock rested at $460.18, experiencing a marginal decrease of $11.02 from its August 23 value of $471.16, marking a mere 2.34% decline.
Curiously, despite this stability, indications suggest that investors may be anticipating a decline in NVDA stock, given the remarkably high levels of its put premiums. Consequently, those who have engaged in short selling of NVDA's put options are reaping substantial profits. This trend in options trading is expected to persist, promising continued profitability.
In essence, Nvidia reported a remarkable revenue of $13.51 billion, marking an 88% increase from Q1 and an impressive 101% surge from the previous year. Of notable significance, the company's free cash flow (FCF) surged to an astonishing $6.048 billion for the quarter, a substantial 2.89 times greater than the $2.643 billion achieved in Q2 2022.
In essence, Nvidia's financial inflow is robust, consistent with our prior discussions. There is a strong rationale to believe that NVDA stock might remain resilient moving forward.
Factors Supporting NVDA Stock Resilience
One pivotal factor supporting the resilience of NVDA stock lies in its reasonable valuation, aligned with historical trends. For instance, over the past five years, its average forward price-to-earnings (P/E) multiple stood at 41.2x, a metric that favors the current P/E multiple. According to Seeking Alpha data, the projected average earnings per share (EPS) for 2023 stands at $10.82, translating to a forward P/E multiple of 42.5x, closely mirroring the historical average from Morningstar.
Furthermore, analysts predict a substantial 46.8% surge in earnings for 2024, with projected earnings per share reaching $15.88. This projection would significantly lower the forward P/E ratio to a mere 29x, well below the historical 41x average. Moreover, the next 12 months indicate an average EPS projection of $13.35 per share, leading to a forward P/E multiple of just 34.5x.
Consequently, if NVDA stock were to ascend to a 41x earnings valuation within the next 12 months, its price target would stand at $547.35 (calculated as $13.35 multiplied by 41x), indicating a 19% increase over the current price.
Analyst Predictions Point to Higher NVDA Prices
The optimism surrounding NVDA stock is further underlined by analysts' projections of an upward trajectory. The average price target noted on Yahoo! Finance stands at $618.04, a consensus derived from a survey of 43 analysts via Refinitiv. This projection suggests that NVDA stock is poised to surge by approximately $157.86, or an impressive +34.3%.
However, the most compelling evidence lies in the elevated put option premiums. These premiums empower short sellers to generate profits by selling deep out-of-the-money (OTM) put options in near-term expirations, capitalizing on the current market dynamics.
Implementing OTM Put Shorting in Nvidia Stock
For instance, in our previous article published on August 1 titled "Nvidia Stock Refuses To Fall - Making Its Puts Attractive To Short Sellers," we advocated shorting the $460 strike price for the expiration ending August 25. Given NVDA's closure at $460.18, this strike price emerged in-the-money.
Investors who garnered $27.83 from shorting these puts over a span of 25 days witnessed a gain of 6.05% (equivalent to $27.83 divided by the $460.00 strike price). This translates to an annualized return of 72.6% provided this strategy can be repeated each month under these favorable put premium conditions.
Moreover, we suggested closing this position and shorting $450 strike price puts that would expire on September 1. At the time, the put premium stood at $23.73, thereby anticipating a yield of 5.27% (computed as $23.73 divided by $450.00).
Today, these puts are trading at a mere $6.53 per put, marking a decline of $17.20 from the initially shorted premium of $23.73. Essentially, the majority of the trade's profit has already been realized with just 5 days remaining until expiration.
Considering this scenario, closing this position and shorting put options expiring at a later date could prove advantageous. For example, the $435 strike price put options expiring on September 22, a span of 27 days, are trading at $11.03 per put.
This strike price remains 5.47% below the current price ($435.00 - $460.18 = -$25.18, yielding -5.47%). It offers significant protection in the event of continued NVDA stock decline. Furthermore, the elevated put option premium leads to a breakeven price of $423.97 ($435.00 - $11.03), positioning investors advantageously.
These $435 strike price puts yield an attractive yield-to-expiration of 2.54% ($11.03 / $435.00), translating to an annualized return of 30.5% if this strategy is replicated monthly throughout a year.
Even if an investor opts to close the September 1 position and invests $6.53, the net premium received amounts to $4.53. This generates a yield of 1.03% over the subsequent 27 days ($4.53 / $435.00 strike price).
This analysis underscores the viable avenues for generating profits through shorting OTM puts in NVDA stock, despite its elevated valuation.
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