While it doesn’t necessarily look like it on the surface, Nvidia (NVDA) just flashed a rare quantitative signal. Over the past 10 weeks, there have been only 3 up weeks, with the remainder being down weeks (defined as negative returns from Monday’s open to Friday’s close). But since the actual loss during this period was just under 3%, this isn’t necessarily a big issue.
Historically, this was actually a big deal. Let’s keep that thought for now.
While the net losses over the past two months haven’t been huge, it’s fair to point out that there’s a cloud of gloom hanging over NVDA stock right now. In the latest month, the security has fallen more than 6%. NVDA is down about 14% since the close on Halloween. Because of market reflexivity — a phenomenon in which perceptions change reality with the help of feedback loops — it’s possible (perhaps possible) that investors think Nvidia is undervalued.
Of course, contrarian speculators have basic, familiar questions: When will NVDA stock rebound and by how much?
Here, we might instinctively consider the analysts’ opinions, with expert consensus predicting NVDA shares will reach around $253 in the next 12 months. While the average rating provides a baseline expectation, it’s also important to note that stock prices are a function of country, not necessarily consensus. Unfortunately, because the true causal state involves countless variables, the answer may never be known.
In other words, the cause of reflexivity is an eternal mystery, but its effects can be calculated. It is here that the bar chart’s expected movement calculator may be the most instructive baseline tool available.
By integrating Implied Volatility (IV) into the proprietary Black-Scholes derived parameter formula, the stochastic price range of a forward option chain can be reverse engineered. Basically, IV is the residual value derived from actual option demand. Therefore, this is an objective benchmark for understanding the trading environment before placing a bet.
Looking at the option chain for February 20, 2026, the expected change calculator predicts a price range from $195.90 to $154.14. Most people would probably consider the downside target to be too pessimistic. However, what will be really interesting is the upside target approaching $196.
Due to the residual impact of options order flow, we have a good idea that call-based strategies approaching the $196 threshold may generate disproportionately greater returns as the market deems reaching that area unlikely. As a broad corollary with some caveats, call options with strike prices rising toward this area are more likely to be sold than bought.
If we had a way to determine NVDA stock’s true odds at the end of the second half of February, we would be in a better position to judge whether to place a bet.
Earlier, I said that NVDA flashed a rare quantitative signal, which can be abbreviated as the 3-7-D sequence: three weeks up, seven weeks down, and an overall downward trend. If we discretize NVDA’s price history and look for previous instances of 3-7-D in the data set, we can calculate the likely eventual outcome for the target security.
As it turns out, the forward 10-week return (adjusted for Friday’s closing price of $175.02) is likely to be between $170 and $198 after NVDA stock delivers the quantitative signal above. In addition, price density is highest between $185 and $190. This is the area of 3-7-D sequence flashing that NVDA wants to focus on.
Interestingly, when aggregating all 10-week series (not just the 3-7-D), NVDA stock tends to cluster around $190. Now, this doesn’t provide much structural arbitrage between the two distributions. Nonetheless, the distribution associated with 3-7-D sequences has a higher relative probability density than the distribution associated with aggregates.
Through distribution analysis and risk geometry calculations, we know that targeting a $190 strike price is a statistically sound bet. So it’s better to exploit Nvidia’s weaknesses and become a buyer rather than a seller.
Equipped with the above market intelligence and all the tools related to it Bar Chart Premiumwe can now easily calculate the most attractive vertical spread. Simply filter for the highest payout associated with the multi-leg strategy, where the second leg strike price is $190. This would be a 185/190 bull call spread expiring on February 20, 2026.
As of this writing, the top payout for triggering $190 at expiration is 170.27%. The break-even point is $186.85.
Still, bull spreads limit potential returns, so there’s always a risk of incurring opportunity costs. However, by calculating the risk geometry we can better mitigate this annoyance.
From our distribution analysis, we know that from $190 to $195, the probability density drops by 89.7%. In other words, beyond $190, probability decay accelerates exponentially. So, if the market is going to offer us a triple-digit payout near the maximum probability mass point, it’s better to make that bet than to make a reckless $195 bet.
Of course, the 190/195 bull spread expiring on February 20th provided a return of over 233%. I don’t think it’s a big deal, though. For an additional 63.06% payout percentage point, you would have to accept a probability decay (penalty) of close to 90%.
This is why I like distribution analysis and risk geometry calculations. With this data, you can buy reality and sell fantasy.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any securities mentioned in this article. All information and data in this article are for reference only. This article was originally published on Barchart.com
