Nvidia Still Looks Cheap - Shorting Out-of-the-Money NVDA Put Options Is Attractive

Nvidia Inc. (NVDA) stock is still cheap here. Shorting one-month out Nvidia put options yields over 1.6% at a strike price 7% lower than the current price. Value investors can set a lower buy-in point and get paid with this play.

NVDA is at $177.39 as of the April 2 close (markets closed today), up from recent lows. It hit a recent trough of $165.17 on March 30. But it could be worth significantly more, given its strong free cash flow (FCF) as well as analysts' price targets.

I discussed its underlying value in a Feb. 27 Barchart article, “Nvidia's Massive Free Cash Flow Margins Could Push NVDA Stock 45% Higher.” I discussed how NVDA could be worth $263.42 per share, assuming it keeps making a 44% FCF margin against analysts' revenue estimates.

Higher FCF Based on Higher Revenue Estimates

Since then, revenue forecasts have risen significantly. For example, analysts now project $369.42 billion for 2026 (FY ending Jan. 2027), up $5 billion from $364.38 billion last month. And for the following year, analysts now project $497.97 billion, up from $449.22 billion (i.e., +10.8%). So, on average, the next 12 months (NTM) revenue could hit $433.7 billion, up from $406.8 billion in my last estimate.

As a result, FCF over the next 12 months could reach almost $200 billion:

  0.46 x $433.7b NTM revenue = $199.5 billion FCF NTM

That's over twice its $95.575 billion in free cash flow in 2025, where it also had a lower 44.7% FCF margin.

As a result, its valuation could be significantly higher.

Higher Price Targets for NVDA Stock

For example, using a 2.22% FCF yield metric, equal to its 2025 FCF divided by its present market cap of $4.311 trillion, NVDA could be worth over $9 trillion:

  $199.5b / 0.022 = $9,068 billion, i.e., $9.07 trillion

That's over 110% higher than today's market cap.

So, just to be conservative, let's assume the FCF margin falls to 44% and the market values Nvidia at a higher FCF yield of 2.50%:

That means it will generate $190.8 billion in FCF (i.e., 0.44 x 433.7b NTM revenue), and its valuation will be $7.6 trillion:

  $190.8b FCF / 0.025 = $7,632 billion

That's still 77% higher than today's market cap of $4.311 trillion. In other words, NVDA is worth 77% more:

  $177.39 x 1.77 = $313.98 price target

This is higher than my previous $263.22 price target. Analysts agree. For example, Yahoo! Finance's survey of 60 analysts is $268.22. That's up from $262.51 last month. Moreover, Barchart's survey price is $268.80.

Nevertheless, there is no guarantee NVDIA will reach this price target. One way to safely play it is to set a lower buy-in point by shorting out-of-the-money put options.

Shorting OTM NVDA Puts

I recommended this play in my March 1 Barchart article, “Nvidia Stock May Be Oversold - What is the Best NVDA Play?” I suggested shorting the April 2 expiry $165.00 put option, which was 6.88% below the trading price. The short-put yield was 3.12% for one month (i.e., $5.15/$165.00).

That worked out well as NVDA closed at $177.39, and the puts were not assigned to buy shares at $165.00. The investor kept the whole yield. This play can now be repeated.

For example, the May 1 expiry $170 puts have a $3.95 midpoint premium. That strike is 4% lower than today. It provides a short-seller a 2.32% one-month yield.

This means an investor who secures $17,000 in cash or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put contract. The account will then receive $395:

  $395 / $17,000 = 0.0232 = 2.32% yield

Moreover, for more risk-averse investors, the $165.00 strike price provides a lower 1.636% yield, but the strike price is 7% lower than the April 2 close:

  $270 / $16,500 = 0.01636 = 1.636% yield

The $165.00 put strike price has a lower delta ratio of 0.229, implying just a 23% chance of NVDA falling to this price, based on its historical volatility. That also makes it attractive to investors who are happy to just receive income, and not potentially buy in at a lower price.

Downside Risks and Mitigation

It's possible NVDA could drop again, and this could result in a potential unrealized loss (i.e., if the strike prices cause an assignment. For example, if NVDA falls to $170.00, the investor's secured cash of $17K will be assigned to buy 100 shares at $170.00. 

However, even if that occurs, the investor's breakeven point is lower:

  $170 - $3.95 from income received = $166.05 B/E

That's still $11.34 lower than Thursday's closing price, or -6.39% of downside protection. It could allow existing investors to potentially lower their overall average cost. And they get to keep the income.

Moreover, an investor could repeat this high-yield short-put play each month. The accumulated income could potentially reduce any potential unrealized loss.

I also suggested buying in-the-money (ITM) calls in my last article. Although the premium is somewhat lower, it still makes sense to use the put income to pay for the higher ITM call premium. I may write more on this in a follow-up article.