Nvidia Stock’s Projected Growth Sparks Interest in Short Selling

Nvidia (NVDA) has captivated investors with the potential for its stock value to soar significantly. Recent reports reveal that NVDA could be valued up to 42% higher at $1,120 per share, all thanks to its robust free cash flow (FCF) and impressive FCF margins. Savvy investors are exploring opportunities to earn extra income through the strategic practice of shorting out-of-the-money (OTM) puts.

The company’s impressive performance in the fiscal Q4 ending Jan. 31 led to a staggering 16% surge in NVDA stock price, which now stands at $788.17 as of Friday, Feb. 23.

Predictions of Nvidia’s upward trajectory date back to earlier prognostications. In my Jan. 8 Barchart article, “NVIDIA Is Blasting Off and Its Powerful FCF Could Push NVDA 50% Higher to Over $736,” and an earlier piece from Nov. 26, my optimism was fueled by a comprehensive FCF margin and FCF yield analysis. Today’s price targets are anchored on the same analysis.

The Power of FCF Margins

Nvidia shows an impressive 22% quarterly revenue growth, a substantial 265% surge from the prior-year quarter. The real star, however, is the FCF vaulting to $11.2 billion, up from $7.04 billion in the preceding quarter.

What truly dazzles is the FCF margin, now standing at an astounding 50.8%. This means that over half of the $22.1 billion quarterly revenue was translated into free cash flow. Free cash flow, the remainder after covering cash expenses including capex outlays and net changes in working capital, can be leveraged for future projections.

Short Sellers Seize Opportunities

Volatility in NVDA stock has led to a spike in put option premiums, an enticing prospect for short sellers on the lookout for enhanced income avenues.

For instance, options expiring on March 15 indicate the $750 put option is trading at $16.30 per contract, offering an immediate 2.21% yield opportunity. Alternatively, risk-averse investors can explore shorting the $740 strike price at $13.40 for a yield play of 1.81%.

Managing Downside Risks

Amidst the considerable downside risks inherent in the NVDA stock’s volatility, there are methods to mitigate potential losses. By shorting the $750 put for $16.30 and simultaneously buying the $740 put for $13.40, investors can secure a net credit of $2.90. This strategy yields 0.38% on the $750 strike price.

Another approach to tackle the $10 spread risk between $750 and $740 is to sell covered calls at the $895 strike price for $7.00, creating a potential earning of $9.90. This multi-pronged strategy guarantees returns even if the stock remains between $750 and $895 by March 15.

Moreover, by holding NVDA long, investors can exploit the upward potential while navigating the risks. By selling the long put at a profit if the stock remains steady, investors can enhance their returns substantially.

Should the stock soar above $895, investors may be obligated to sell the covered call at that price, unlocking significant returns. The total potential return, including capital gains and income, could reach an impressive 15.69%

Stay tuned for more Stock Market insights from Barchart.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.