Can NVIDIA Make a Comeback? Is it Risk or Opportunity to Enter Now?

Today, I'd like to discuss why NVIDIA suddenly fell, institutional attitudes toward NVIDIA, and potential investment strategies going forward. Hopefully, this will be helpful to everyone.

Super Micro Computer Inc. crashed 23% on April 19 (last Friday) due to its announcement of financial performance for the third quarter to be revealed on April 30.

While such an announcement might seem ordinary, SMCI deviated from its usual practice by not providing preliminary financial results. For instance, in January of this year, SMCI advanced its second-quarter profit guidance by 11 days, resulting in a strong stock surge and boosting shares of AI concept stocks.

This time, however, only a statement was issued without any financial guidance, interpreted negatively by the market. Consequently, at the opening bell, investors rushed to sell SMCI stocks, causing widespread unease in the market, with more investors joining the selling frenzy, leading to an unstoppable decline.

Why does SMCI's decline affect NVIDIA?

SMCI is a crucial supplier to NVIDIA, and its stock price often correlates closely with NVIDIA's performance. Similarly, when SMCI performs poorly, this uncertainty further fuels investors' concerns about NVIDIA's performance, exacerbating the selling pressure on chip stocks.

Options Movement—Interpreting Institutional Reactions
Last Friday, NVIDIA saw four large options trades, indicating institutional involvement. Let's interpret institutional attitudes through options activity.

Institution 1: Initiated buying calls with an expiration date of May 17 and a strike price of $760, while simultaneously selling an equal number of puts with the same expiration date and strike price, creating a "synthetic long" strategy, indicating optimism about NVIDIA's future growth.

For those unfamiliar with this strategy: buying calls is a bet that NVIDIA's price will rise, while selling puts is a bet that NVIDIA's price will not significantly drop, and the premiums from selling puts can offset the cost of buying calls.

Institution 2: Purchased puts with an expiration date of May 17 and a strike price of $550, while simultaneously selling an equal number of calls with the same expiration date and strike price, creating a "synthetic short" strategy, indicating a bearish outlook on NVIDIA's future performance.

Similarly, buying puts is a bet that NVIDIA's price will decline, while selling calls is a bet that NVIDIA's price will not significantly rise, and the premiums from selling calls can offset some of the cost of buying puts.

To profit from this strategy, NVIDIA's stock price must be below $600 at least. Unless extremely bearish on NVIDIA's prospects, this strategy is likely used as a hedge against a large long position in the stock.

Personal Opinion and Strategy
Observing a common interpretation in the market, I strongly agree: the underlying reason for Friday's decline lies in the overall negative sentiment in the market. The market is currently plagued by multiple concerns, including inflation fears due to rising interest rates, evolving geopolitical risks, and disappointing Q1 performance of US stocks.

In such conditions, even the slightest uncertain event could spark panic selling in the market.

Following its earnings release on March 20, MU surged by 13% the next day, reaching a historical high stock price by April 4, with a cumulative increase of 32%. Clearly, the market's response to MU has been satisfactory, even exceeding expectations.

MU estimates its Q3 2024 revenue to be $6.6 billion, significantly exceeding Wall Street's estimate of $6.02 billion, implying that the upswing cycle in the chip sector is likely to continue for some time, still in the stage of recovery and ascension.

Although there is a consensus in the market that the growth demand for AI chips next year may slow down compared to this year, analysts' revenue and EPS growth estimates for NVIDIA in 2025 are only around 20%.

However, the extent of the slowdown is still uncertain, as the demand for chip performance is currently trending upwards, with no signals yet indicating the magnitude of the slowdown. Therefore, until clear signals of change emerge, I believe it is premature to be bearish on the semiconductor sector.

Regarding investment strategy, I still prefer to use options. When industry leading indicators rise, NVIDIA should not fare too badly. Plus, coupled with last Friday's unexpected blow, I still hold bullish expectations for NVIDIA's performance this time.

I plan to hold calls with a strike price of $880 (10% above the current price) and an expiration date of May 31 (post-earnings). A rise in IV before earnings or an increase in stock price after earnings can effectively drive up the price of options.

Additionally, I've noticed that Futu's option prices have recently been adjusted downward. Option premiums lower than $0.1 are now charged at $0.15 per contract, which is relatively friendly for players in low-priced near-term options.

Novice option users can start with simulated trading to experience trading paths and validate market judgments. (As a small capital investor, I often use simulated trading for learning).

Compared to stocks and options, ETFs are more stable:
ETFs are more resistant to declines than individual stocks, better mitigating the risk of a pullback from current highs.
ETFs don't worry about being trapped. Even if the market suddenly loses interest in AI, being trapped in an ETF is just a matter of time cost, without the worry of stock prices not rebounding like individual stocks.
Additionally, short to medium-term operations with ETFs are easier, without worrying about unsystematic negative news.

As the saying goes: buy stocks at low levels, buy indexes at high levels. Because at low levels, stocks have a higher rebound potential than ETFs, while at high levels, ETFs are better at resisting declines and risk. If you have a low risk tolerance, ETFs are a good choice.

That's all for today. With earnings season approaching, I wish all the mooers fruitful returns during this period!