How I'm Trading Nvidia's Earnings Using My PFP System

Nvidia NVDA posted earnings after Wednesday's close, beating sales but missing earnings per share. Forward guidance was positive, and the stock gained about $7 from $134.88, close to $141.35 as of this writing.

But after lots of movement overnight and on Thursday morning, NVDA stock has been stuck in place.

This won't last.

My PFP system, which stands for Positioning, Flows, and Price Action, uses options market data to predict where stocks will go next. Let's start our look into NVDA by looking at where options traders are positioned.

Positioning In NVDA

Looking at the positioning chart below, where blue bars mean call gamma and pink bars mean put gamma, we can see that there is much more call gamma than put gamma. This is natural for a stock like NVDA, which has had a lot of momentum for a long time. After all, NVDA is up almost 22% over the last year, and a whopping 1,477% over the last five years.

The bulk of the option positions are between $150 and $130, with $140 being our TGS (top gamma strike). We have both $145 and $150 acting as the TCS (top call strikes), so those are the main targets institutions are gunning for to the upside, while $135 and $130 are the TPS (top put strikes), which are the bear targets.

With the TGS at $140, I would not be surprised to see NVDA oscillate around here and try to use this as a base to launch higher. A close above $140 would bolster the upside case as we'd be in a strong positive gamma condition. Meanwhile, closing below $140 would weaken the upside case.

From a positional standpoint in the PFP system, I see $145 and $150 as natural upside targets should NVDA hold $140. If there’s a positive close, I will look for bullish trades targeting that.

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Flows In NVDA

Flows were strong after earnings with institutions heavily trading shares in the after-hours market. In the cash session on Thursday, traders are buying calls (~281M in notional deltas) and selling puts (~100M in notional deltas) so the options market is bullish on this ticker.

57% of those option flows expire on Friday, so there are lots of short-term trades, but 43% are further out in time. The removal of the short-term flows on Friday should hamper upside gains, but next week looks favorable for more upside. Two-thirds of the puts sold on Thursday expire after Friday, so longer-dated short puts are entering the market (or closing of long puts).

In other words, the overall options flow is bullish, not just for tomorrow, so I like the bullish prospects—again if NVDA closes above $140.

Price Action On NVDA

Looking at the 5-minute chart below, you can see NVDA pushing higher after its earnings release. It ended up just shy of the implied move ($9 up/down) to $143, and as I'm writing this, it is sitting around $141.37.

The price action on Thursday was mostly corrective after an impulsive move higher. This price action suggests more upside and the $140 TGS has held the first attempt. If we close below $140, I lean towards the next leg being higher.

How I'm Trading It

On Wednesday, for my Benzinga Options School and Trading Waves members, we traded NVDA using a long iron condor (a long bull call spread and a long bear put spread) as we anticipated a strong response after earnings. Thus far, that prediction has proved correct and we anticipate more directional flows over the next 2-3 weeks up to the June op-ex.

If we get a strong close to the week, we'll look at adding a bull call spread for the June op-ex and reducing our bear put spread exposure. However, volatility was underpriced 2-3 weeks out for NVDA, so being long, volatility is my preferred method going forward.

Editorial content from our expert contributors is intended to be information for the general public and not individualized investment advice. Editors/contributors are presenting their individual opinions and strategies, which are neither expressly nor impliedly approved or endorsed by Benzinga.

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