Nvidia stock may be oversold

Nvidia Inc.NVDA) Stocks may sell off sharply after last week’s earnings release. It can be valued at over 50% using FCF value, as shown in my February 27 Barchart article. Two plays: sell one month short OTM for 3% yield; Buy ITM phones after six months.

NVDA shut down on time $177.19 On Friday, Feb. 27, $195.56 is lower than the previous earnings of Feb. 25, but still higher than the recent low of $171.88, although its six-month low on Sept. 5 is $167.02.

Has this shortage increased? That seems to be the case, especially given Nvidia’s strong free cash flow (FCF) and FCF margins.

I discussed this in my February 27 Barchart article, “Nvidia’s huge free cash flow margin could push NVDA stock up 45%“I showed that NVDA is worth $263 per share.

Here is a summary of how I estimated this price target.

NVIDIA generates an FCF margin of 44.7% in 2025. FCF could rise to $161 billion by 2026. This is based on analysts’ 2026 revenue estimate of around $365 billion using a 44% FCF margin:

$364.38bx 0.44 = $160.3b$

This means that its value may increase 6412 billion dollarsUsing the 2.5% FCF yield metric:

$160.3b estimate FCF/ 0.025 = $6,412 billion

This Yahoo! finance So, the price target is 48.8% higher:

$177.19 Today’s price x 1.488 = $263 price target (PT)

The point is, based on Nvidia’s strong FCF margins, if they continue through 2026 (and there’s every reason to believe they will based on management’s guidance), NVDA stock is deeply undervalued.

However, NVDA stock could remain cheap for some time. So, what’s the best game here?

One way to play NVDA, especially for value investors who want to set a potential low buy point, is to sell out-of-the-money (OTM) short in the one-month expiration period.

Thus, an investor can cash out after posting the warrant and wait to buy NVDA at a lower (ie, OTM) price.

For example, the April 2, 2026, expiration date shows that the $165.00 strike price, which is 6.8% lower than Friday’s close, has a higher premium. As a result, its midpoint price of $5.15 gives short sellers of this contract immediate 3.12% One month’s yield (ie, $5.15/$165.00).

Here’s what that means in practice.

First, the investor contributes $16,500 in cash or purchasing power to his brokerage firm. $16.5K serves as compensation if NVDA falls to $165.00 on or before April 2nd (ie, $165 x 100 shs per contract).

The investor can then enter an order to “Sell to open” 1 contract at $165.00. A cash collateral allows the brokerage firm to lend contracts to the selling investor so they can own the first or “open” trade without selling them short.

At some point, the investor must “buy to close” the contract or if the stock remains at $165.00 by April 4, the contract will expire. At that point, the collateral is released back to the investor (ie, $16.5K cash is no longer restricted).

Then, the brokerage firm will immediately post $515 (ie $5.15 x 100 shs per contract) to the short seller’s account. So, the investment immediately earns 3.12%:

$515/$16,500 = 0.0312 = 3.12% for one month

Additionally, this also means that the investor potentially has a very low breakeven (B/E) point, if NVDA falls to $165.00 on or before April 2:

$165.00 – $5.15 = $159.85 breakeven (B/E)

This B/E is almost 10% below Friday’s close (ie -9.79% below $177.19). That’s why value investors love such plays. They earn money while waiting to buy at a lower price.

Note that a more risk-averse investor could short the $160.00 put contract, which is 9.7% lower than Friday’s close, providing more downside protection. They can make one 2.3475% One-month yield ($3.90/$160.00), with a low B/E of 11.9% ($156.10/$177.19-1).

But, what if NVDA goes up from here or never drops to $165.00? A short-term investor does not see any increase in price as a long-term value buyer would have.

One way to play this is to also buy a 6 month expiring call option at the same $165.00 strike price. This call option is in the money (ITM), because the spot price, $177.19, is higher than the call strike price.

For example, a September 18, 2026, expiration date indicates that a $165.00 call option has a midpoint premium. $32.80. That means the investor will have to pay $3,280 for this year’s option.

Its intrinsic value is $177.19-$165.00, or $12.19, and$1,219 per contract. So, the extra money paid for this year (ie, its extrinsic value) is:

$32.80-$12.19 = $20.61or $2,061 per contract

However, if an investor continues to earn $515 for 6 months by shorting one-month OTM puts, the total accumulated would be $3,090. It covers more than the external value paid.

For example, suppose an investor can make $3,000 short OTM puts for 6 months:

$3,280 Paid for Year – $3,000 Income from Pots = $280 Net Expense for Year 9/19/26

In other words, investors would have a net cost of $16,780 per share (ie, $16,500 + $280/100 or $167.80 per year) if they exercised the call.

So, if NVDA closed at $220 on September 19, the total return would be:

$22,000 – $16,780 = $5,220

Given the $16,500 per month cash-secured collateral cost paid to short puts, this comes to a 6-month ROI of 31.6%:

$5,220 / $16,500 = 0.3164 = 31.64%

NVDA would have created a long-standing single client 24.16% (ie, $220/$177.19), or + $4,281 for 100 shares. However, the short-term investor will still use the $16,500 return compensation.

So, the investor’s actual ROI is very high, given its low cost base, short-term play income accumulation over the period, and in-the-money (ITM) downside protection.

The bottom line is that value investors like to short OTM puts and buy ITM calls on NVDA stock at today’s prices.

As of the date of publication, Mark R. Heck, CFA held no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com