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Nvidia turnaround? One trader’s clever play on the volatile semiconductor stock

One of hottest stocks over the past year has come off of all-time highs, but Todd Gordon of TradingAnalysis.com says the charts make a compelling case for buying on the pullback.

As of Thursday, Nvidia was down 15 percent from the intraday all-time high that it hit on June 9. But the stock has still tripled over the past year, making it the best performer in the S&P 500.

And according to Gordon, a look at the charts shows that the chipmaker’s almost 3 percent gain this week could suggest that history is about to repeat itself and that Nvidia is about to head higher.

Gordon specifically points to what he’s calling a “three-wave pullback,” in reference to the three previous times when Nvidia has fallen, only to then surge to new highs. Based on the length of the past pullbacks, the recent drop in Nvidia looks to be complete, according to Gordon, meaning that the stock will mirror past moves and rally.

“We are right on top of the equality point, so basically this distance is equal to the prior correction,” he said Thursday on CNBC’s “Trading Nation.” “You see this kind of symmetry in the markets all the time. If you just know how to look for it, you can pick up some pretty good turning points.”

Since Nvidia looks to be at the tail end of its pullback, Gordon believes that the support level for the stock is between $135 and $140, which the shares have bounced up from in the past week. And since implied volatility, which measures the relative price of options, is so high, he wants to make a bullish bet on Nvidia by selling options rather than buying them..

As a result, Gordon is selling the July 21 140-strike puts and buying the July 21 135-strike puts for $2.04 total, or $204 credit per options spread.

Should Nvidia close above $140 on July 21 expiration, Gordon would get to keep that amount, for his maximum profit of $204. The trade breaks even at $137.96, and if Nvidia closes below $135 on July 21, Gordon would suffer the maximum loss of $296.

However, should the stock fall to $135 before expiration, Gordon would advocate exiting the trade, which would likely mean taking a smaller loss.

To be sure, the options are expensive for a reason. Nvidia shares traded in a nearly 4 percent range on Thursday alone. The stock’s volatile nature means that both bullish and bearish bets have a better chance of paying off than would options on most other stocks.

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