NVDA Unusual Option Activity Report

No, this isn’t a Super Bowl story about chip consumption, but rather U.S. based chip-maker Nvidia Corp (Nasdaq: NVDA). This is a dynamic that has been playing out for months and is continuing to get more real. The shortage is leading many semiconductor companies to ramp production back up and the options market is taking notice. Today, NVDA broke out on high volume as call activity surged.

As the pandemic-induced closures ramped up, car sales and production dropped quickly. This led to semiconductor companies scaling back production. Now, as things are starting to improve and vehicle production is ratcheting back up, carmakers have had to slow production due to a shortage of chips.

For example, Ford Motor Company (NYSE: F) shut down their Louisville plant temporarily. Fiat Chrysler has halted production in their Brampton, Ontario, and Toluca plants. Nissan has shut down their operations in their Oppama factory in Japan.

The shortage appears to be good news for semiconductors that source to the auto industry as companies like NVDA ramp up production.

NVDA Option Activity

At the time of this writing, NVDA option volume was over four times the average. Call option volume was over five times the average and put volume was over three times the average. The put-to-call ratio was 0.35, which shows a bias for call option at a ratio of 3:1. Looking at the composition of the call volume, around 28% of the call option trades were filled at the ask with 56% getting filled between the market. Here’s a breakdown of the significant activity:

• 6,600 12 FEB 21 $570 calls mostly BOT @ $2.26 to $6.66 against open interest of 3,306

The activity occurred just after today’s open and continued to spread across many strikes for the 12 FEB 21 expiration. The activity also occurred alongside significant activity in fellow semiconductor stocks Advanced Micro Devices, Inc (NASDAQ: AMD) and Taiwan Semiconductor Mfg Co Ltd (NYSE: TSM).

NVDA Technicals

Since September 2, 2020, NVDA has been consolidating its gains since its March lows. The resulting pattern of lower highs and lows has created a symmetrical triangle formation. That price pattern looks to complete today as the price is trading through the resistance and will have significantly greater volume by the end of the day than its 6.1 million share average. As earnings approach on February 24, 2021, this could be an indication of a pre-earnings run in anticipation of a positive result.

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While the strike price is now at-the-money, the activity was pointing to an expectation of a breakout in NVDA. The range of the pattern has a measured move of $120, measured from its $590 high to its next low near $470. That gives a target price of $675 by taking the measured move and adding it to the $55 breakout level.

Conclusion

NVDA has a history of beating analyst estimates and has a 22% 5-year projected EPS growth rate by analysts. While not a cheap stock in terms of valuation, the potential for a near-term bullish move on the chip shortage is real, and it's potentially breaking out of a longer-term consolidation phase. With the market melting up, traders may be looking for the next stock or industry to take higher.