In Case Akram's Razor Is Right About Nvidia
Summary
- Nvidia was a Portfolio Armor top name in January of 2016, and has been periodically since then, including last November 2nd, when it appeared in my top names subscriber post.
- Since then, it's up modestly, but recently Seeking Alpha contributor Arkam's Razor argued Nvidia could call to $140 this year.
- I present two ways Nvidia shareholders can stay long while strictly limiting their risk in the event Arkam's Razor is right this time.
Nvidia Booth at Computex Taipei (credit: Computex Taipei)
Still Right, But Losing Steam
Nvidia (NASDAQ:NVDA) was a Portfolio Armor top name back in January of 2016, when it was trading at under $28 per share, as I noted in an article last year (What Happens When We're Right). It was also a top name on November 2nd of last year. It's up since then, but more modestly. And recently, pseudonymous Seeking Alpha contributor Akram's Razor argued that Nvidia could fall to $140 per share this year. Here I recap how that November 2nd top names cohort has done so far, and then I show a couple of ways NVDA shareholders can stay long while limiting their risk over the next several months.
Nvidia And Our November 2nd Top Names
Each week since June 8th of last year, I've been presenting Portfolio Armor's top names to my Bulletproof Investing subscribers. These are the names that, out of the subset that are hedgeable against single-digit declines, the site estimates will have highest potential returns over the next 6 months. So far, their 6-month performance has been fairly strong, as you can see in the table below (clicking on a starting date will pull up a chart showing the individual names that week, and their performance).
| Starting Date | Portfolio Armor 6-Month Performance | SPY 6-Month Performance |
|---|---|---|
| June 8, 2017 | 14.49% | 9.99% |
| June 15, 2017 | 19.85% | 10.97% |
| June 22, 2017 | 24.46% | 11.27% |
| June 29, 2017 | 18.24% | 11.68% |
| July 6, 2017 | 21.03% | 14.81% |
| July 13, 2017 | 28.25% | 14.85% |
| July 20, 2017 | 25.04% | 14.62% |
| July 27, 2017 | 33.52% | 17.10% |
| August 3, 2017 | 20.72% | 12.66% |
| August 10, 2017 | 13.05% | 8.36% |
| August 17, 2017 | 10.71% | 13.48% |
| August 24, 2017 | 15.23% | 13.72% |
| August 31, 2017 | 8.42% | 10.87% |
| September 7, 2017 | 12.75% | 11.61% |
| September 14, 2017 | 29.19% | 11.19% |
| September 21, 2017 | 22.56% | 9.42% |
| September 28, 2017 | 14.30% | 4.73% |
| October 5, 2017 | 11.53% | 5.26% |
| October 12, 2017 | 15.46% | 5.38% |
| October 19, 2017 | 20.73% | 6.08% |
| October 26, 2017 | 18.10% | 5.13% |
| Average | 18.93% | 10.63% |
The November cohort will be added to that table in a few days, but here's what it looked like when I posted it on Bulletproof Investing then:
Interestingly, NVDA was in the middle of the pack of the top 10 on November 2nd, and its performance since then has been in the middle of the pack as well:
NVDA is no longer a top Portfolio Armor name (it's currently #294 on the site's daily ranking), but the site still estimates a positive return for it over the next 6 months. In the event it's wrong, and Akram's Razor is right, let's look at a couple of ways you can limit your risk while staying long.
Limiting Your Risk In Nvidia
Let's assume you're long 500 shares of NVDA and are unwilling to risk a decline of more than 20% over the next several months. Here are two ways of hedging it (screen captures below are via the next version of the Portfolio Armor iPhone app).
Uncapped Upside, Positive Cost
As of Monday's close, these were the optimal puts to hedge 500 shares of NVDA against a >20% decline by late December.
As you can see above, the cost here was $6,700, or 5.96%, calculated conservatively, using the ask price of the puts. By the way, the basic version of the Portfolio iPhone app, which allows you to find optimal puts like the one above, is now free to download.
Capped Upside, Negative Cost
If you were willing to cap your upside at 20%, this was the optimal collar to hedge against the same >20% decline over the same time frame.
You might have noticed two things different about this hedge. The first is that, after an iterative process taking into account its net cost, the hedging algorithm was able to find a slightly less expensive put strike, one that lowered the cost of the put leg to $4,525, or 4.02% of position value (calculated conservatively again, using the ask price of the puts). The second is that cost was more than offset by the income of $5,900, or 5.25% of position value, generated from selling the call leg (calculated conservatively, at the bid).
So the net cost was negative, meaning you would have collected a net credit of $1,375 when opening this hedge, assuming you placed both trades at the worst ends of their respective spreads.
Wrapping Up
The last two years haven't been kind to those who've bet against Nvidia, but there is a risk Akram's Razor will be right this time. Both of the hedges above offer Nvidia longs a shot at additional upside while strictly limiting their downside risk. They might be worth considering.
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