While it doesn’t necessarily look like it on the surface, Nvidia (NVDA) just issued a rare quantitative signal. Over the past 10 weeks, there have been only three instances of up weeks, with the rest being down weeks (defined as a negative return from Monday’s open to Friday’s close). But because the actual loss during this period was just under 3%, it doesn’t necessarily register as a big deal.
Historically, it’s actually a huge deal. Let’s hold that thought for now.
Even though the net loss over the past two months hasn’t been significant, it’s also fair to point out that a brooding cloud currently hangs over NVDA stock. In the last month, security has fallen by over 6%. Since Halloween ended, NVDA is down about 14%. Due to market reflexivity — a phenomenon where perception, aided by feedback loops, alters reality — it’s possible (probably) that investors see Nvidia as undervalued.
Of course, contrarians have basic, common questions: When will NVDA stock go up and how much will it go up?
Here, it may be instinctive to consider analyst views, where the expert consensus is that NVDA stock will reach around $253 in the next 12 months. While average valuations provide a basic expectation, it is also important to note that stock prices are state functions and not necessarily a consensus function. Unfortunately, since the true causal state involves a million variables, the answer may never be known.
In other words, the cause of reflexivity is forever a mystery, but its influence can be calculated. This is where Barchart’s Expected Move calculator can be the most instructive reference tool available.
By integrating implied volatility (IV) into a Black-Scholes parametric derivative eigenformulation, it is possible to reverse engineer a stochastic price range for forward option chains. Basically, IV is a residual value derived from the actual demand for options. Therefore, it is an objective benchmark for understanding the trading environment before placing the bet.
Looking at the options chain for February 20, 2026, the Expected Move calculator estimates a high-low price range of $195.90 to $154.14. Most people would probably consider the negative target to be unrealistically pessimistic. However, what is really interesting is the target near $196.
Due to the residual impact of option order flows, we have a good idea that strategies based on calls approaching the $196 threshold will likely generate disproportionately higher rewards, as the market considers reaching this area unlikely. As a general conclusion, with some caveats, calls with rising strike prices in this area are more likely to be sold than bought.
If we had a way to determine the true odds of where NVDA stock could end up in the second half of February, we can make a better judgment about whether to take the bet or not.
Earlier, I said that NVDA displayed a rare quant signal that can be abbreviated as a 3-7-D sequence: three weeks up, seven weeks down, with an overall downward slope. If we discretize NVDA’s price history and search our dataset for past examples of 3-7-D, we can then calculate where the target security is likely to end up.
As it turns out, after NVDA shares issue the aforementioned quantized signal, 10-week returns — when adjusted against Friday’s close of $175.02 — could range between $170 and $198. Additionally, price density is highest between $185 and $190. This is the area that NVDA would like to gravitate to after flashing the 3-7-D sequence.
Interestingly, when all 10-week sequences are aggregated – and not just the 3-7-D – NVDA stock would tend to rally around $190. Now, this does not provide much of a structural arbitrage between the two distributions. However, the distribution associated with the 3-7-D sequence exhibits a much higher relative probability density than that associated with the aggregate.
Due to distributional analysis and risk geometry calculation, we understand that the $190 strike price target is a statistically reasonable bet. As such, it may be better to be buyers of Nvidia’s weakness – not sellers.
Armed with the above market information and all the tools associated with Barchart Premiernow we can easily calculate the most tempting vertical spread. Simply filter for the highest payout associated with multi-stage strategies with a $190 strike on the second stage. That would be the 185/190 call spread expiring on February 20, 2026.
At the time of writing, the maximum payout to trigger $190 at expiration would be 170.27%. Breakeven comes in at $186.85.
However, bull spreads limit the potential reward, so there is always the risk of incurring an opportunity cost. However, by calculating the geometry of risk, we can better mitigate this annoyance.
Thanks to our distributional analysis, we know that from $190 to $195, the probability density drops by 89.7%. In other words, beyond $190, the probability decay accelerates exponentially. Therefore, if the market is going to give us a triple-digit payout near the point of greatest probability mass, it’s better to take that bet than be reckless and take the $195 bet.
Sure, the 190/195 bull spread that expires on February 20th offers a payout of over 233%. However, I don’t think it’s a big deal. For another 63.06% of payout percentage points, you’d have to accept a forfeit (penalty) probability of nearly 90%.
That’s what I like about distributional analysis and calculating risk geometry. With this data, you buy reality and sell fantasy.
At the time of publication, Josh Enomoto did not own (either directly or indirectly) any position 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
