How to Trade NVDA After China's Shock AI Reveal

AI and Big Tech got rocked on Monday as China unveiled their DeepSeek open-source AI program, a ChatGPT competitor.

The short and skinny of it is that China managed to create an AI chatbot that performs as well as ChatGPT, for only $6 million dollars – a 90+% discount to the initial funding for ChatGPT which was at $100 million. On top of this, China did it with less expensive, and fewer, GPU chips.

These twin data points hulk smashed the Silicon Valley AI and Big Tech stocks, challenging the notion you need the most advanced (NVDA-made) chips and nine figures or more to create an AI.

As you can imagine, NVDA took a beating, dropping almost 17% yesterday.

Here's what my PFP system (Positioning, Flows and Price Action) says NVDA stock is about to do next.

NVDA was the biggest recipient of the DeepSeek news (in a bad way) as every tech firm building (or wanting to build) an AI was buying the most expensive NVDA chips out there, scooping up supply anywhere they could. NVDA profited heavily from this and there was this unshakeable belief that the only way to make a powerful AI like ChatGPT was to get the best chips from NVDA.

Not anymore.

This sent NVDA and many AI tech firms reeling, with the former shedding over -11% in value just in pre-market action on Monday. By the Monday cash session close, that drop grew to a -16.63% loss.

NVDA traded 100s of millions of shares, its largest share trading day in weeks and in the options space, printed over -600M (million) in notional deltas via a massive dumping of long calls (via short calls which = negative deltas) along with long puts (also negative deltas).

It is important to note that NVDA is one of the top three largest components of the S&P 500, so NVDA losing ground takes QQQ and SPY with it. There is also a large ‘complex' of ETFs around NVDA like SMH, NVDL, NVD and more, many of which are ‘levered' ETFs. Thus, the hammering of NVDA has shaken the trading/investor space massively to the tune of billions.

Right now, Silicon Valley and the rest of the US is having a big think about the future of AI and investments. This will create a massive reshuffling of priorities and investments, but let's take a look under the hood at the options space to see where we think NVDA can go from here using my PFP system (Positioning, Flows and Price Action).

Positioning in $NVDA

Heading into Monday, the TPS (top put strike) for NVDA was $130, which means the largest concentration of bearish positions heading into the Monday session was $130. The stock gapped below $130, thus forcing us to see if there was positioning and fuel to go lower. There was. In my live Benzinga Option School class, I said 15 mins after the market open "We think NVDA is going lower, likely to $120." This was when NVDA was at $128. It hit $120 only 1.5hrs later.

With the heavy selling, bullish traders have sold calls and bought protection via long puts. This buying of puts lower gives NVDA more fuel to go lower. The current TPS is now at $110, and we see $100 as a viable strike should more selling pressure mount.

Thus, from a positioning perspective, we see scope (if NVDA continues lower) for a move to $110, perhaps even $100. This would require more long puts being bought, more long calls sold, and more shares sold.

Now let's examine the option flows for today.

Option Flows in NVDA

While yesterday was a one-way train with calls being sold and puts being bought (both bearish), today is painting a different picture with calls being bought and puts being sold (both bullish).

However, there is a caveat here. The level of ‘aggression' (i.e. how aggressively calls are being bought and puts sold) is incredibly mild compared to yesterday. Currently we're printing about +150M in notional deltas with most of that being calls bought. This could be either a) new traders buying long calls, or b) traders who sold calls on Monday taking profits today.

If it's the former, it helps build a small base, but if it's the latter, then we're just witnessing a dead cat/corrective bounce which at best leads to mild gains (grinding) higher and could lead to more impulsive selling lower.

Thus, I'm not impressed by the follow up buying today – it doesn't inspire confidence.

Price Action in NVDA

Looking at the 5-minute chart below, we can see the initial pre-market selloff from the DeepSeek news, highlighted by the impulsive/corrective/impulsive selling, now producing a larger corrective structure.

From a pure price action perspective, I lean towards the line of least resistance being lower, so I would not be surprised to see another leg lower.

In summary, when we look at NVDA via my PFP system, I don't think we're out of the woods yet. Hence, I am not ready to start buying NVDA or getting bullish. I still lean towards more correction, and a potential leg lower being more probable than an impulsive leg higher.

Now we have two events this week which could change the fate of NVDA – that being a) the Fed's interest rate decision on Wednesday, and b) big tech earnings on Wednesday and Thursday. Those could really help bring NVDA out of the gutter, but if neither of those spark any more bullish flows, NVDA is the most vulnerable in the AI and Big Tech space.

I'll update my Trading Waves and Benzinga Option School members with my trade ideas just before the events, but this week should provide a lot of forward guidance and directional cues, perhaps for the rest of the quarter. I'll see you there!

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