Options Corner: Why Nvidia's Red-Stained Chart May Be Good News For Contrarian Investors

Both history and folklore are replete with accounts of circumstances looking incredibly grim — until an unexpected catalyst delivers a much-needed reprieve. Investors of semiconductor giant Nvidia Corp NVDA will be hoping for just such a turnaround. While the company has practically been synonymous with the remarkable rise of artificial intelligence, NVDA stock hasn't been looking like itself lately. Still, the volatility may present a statistically backed upside opportunity for contrarians.

To be sure, no one's saying that Nvidia is headed for the garbage bin. Since the start of the year, NVDA stock has gained around 24%, which is very respectable considering its prior blitzkrieg of the market. Nevertheless, since the close of Aug. 12 (where shares finished the session at $183.16), NVDA has dropped over 9%.

It raises the obvious question: what happened?

On paper, the narrative appeared auspicious for NVDA stock. Once again, the semiconductor juggernaut posted a blowout quarter with what would broadly be considered strong guidance. Nvidia easily beat Wall Street's consensus targets on the top and bottom lines. It also delivered tremendous growth on both headline metrics against a year-ago comparison. Plus, for its October quarter, management guided revenue between $52.92 billion and $55.08 billion, above the consensus estimate of $52.96 billion.

Still, some analysts had hoped for a bit more in terms of guidance. Additionally, uncertainty over sales in China — which is a critical market — dampened enthusiasm. If that wasn't enough of a concern, Broadcom Inc AVGO laid down the gauntlet with its latest earnings results.

It wasn't so much about the raw numbers, though they were excellent, with a robust top-and-bottom-line beat. Rather, AVGO stock popped dramatically higher on Friday thanks to the underlying company's optimistic forward guidance and subsequent analyst price target upgrades.

Helping move the needle for AVGO was Broadcom's assertion that it can take market share from Nvidia in the AI chip space. Subsequently, NVDA stock had arguably little choice but to fade away. Still, this may be an opportunity for patient contrarians.

Using Statistical Validation To Confirm Buy-the-Dip Sentiments For NVDA Stock

Because Nvidia remains a powerhouse in the AI ecosystem, the concept of buying NVDA stock on any dips is hardly original. However, before investors blindly jump into NVDA or any other deflated security for that matter, it's important to statistically validate the contrarian thesis.

Almost without fail, nearly every public-facing investment thesis utilizes what's known as in-sample arguments. Structurally, this is where the claim and the evidence to support the claim come from the same dataset. By logical necessity, such arguments are self-referential.

To be fair, in-sample arguments aren't necessarily problematic — a claim has to come from somewhere. But the problem is when the assertion stays in-sample and never tested out-of-sample to determine the probability of causality (not just an observation of coincidentally correlating elements). In colloquial terms, the Flying Spaghetti Monster (FSM) cannot be proven to exist merely because you claim to have prayed to it and it helped you find your keys.

Even longstanding concepts such as the Santa Claus rally are in-sample arguments. That's the equivalent of praying to the FSM a hundred times and claiming that it helped you find your keys 70 times. Because the claim and the evidence are from the same dataset, the thesis is unfalsifiable. Merely expanding the scale of "analysis" doesn't change the circularity of the argument.

Regarding NVDA stock, the latest bout of volatility would mean that by today's close, the security would have printed a "5-5-U" sequence: five up weeks, five down weeks, with an overall upward trajectory. That's a balanced signal and from the in-sample dataset that runs from January 2019 through July 2025, investors can expect a broad drift over the next 10 weeks from a median low of $167.18 to a median high of $200.11.

As an aggregate, the expected baseline drift would likely carry NVDA stock between $180.27 and $187.77. So, under this framework, NVDA stock offers upside potential with some risk of sustained volatility. However, the assertion is again in-sample and thus circular.

To have true confidence in the buy-the-dip thesis, we need to run out-of-sample tests. I ran two, one for the first half of the 2010s decade and another for the second half:

While a detailed dive into the out-of-sample data would extend beyond the scope of this article, the main takeaway is that in both cases, the balanced 5-5-U sequence represented a longer-term buying opportunity. With the signal being resilient across sentiment regimes, this is how we can have confidence in a contrarian position.

A Bull Spread Too Tempting To Ignore

Based on the market intelligence above, the one transaction that stands out is the 170/175 bull call spread expiring Oct. 17. This transaction involves buying the $170 call and simultaneously selling the $175 call, for a net debit paid of $205 (the most that can be lost in the trade). Should NVDA stock rise through the short strike price ($175) at expiration, the maximum profit stands at $295, a payout of nearly 144%.

What makes this trade so tempting? Simply, both the aggregate and conditional drift (associated with the 5-5-U sequence) should take NVDA stock above $180 by the Oct. 17 expiration date. So, if market makers are willing to give us a 144% payout for a probabilistically superior wager in our favor, that generosity is difficult — no, impossible — to ignore.

This doesn't mean there are no risks associated with NVDA stock. As mentioned earlier regarding the projected pathways, there is a possibility of sustained weakness. However, running out-of-sample tests shows that, more often than not, NVDA skews upward.

For betting folks, Broadcom's shot across the bow provides a very intriguing opportunity in NVDA stock.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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