Nvidia (NVDA) bulls are facing a challenging pre-earnings environment as the stock’s recent decline has rendered many short-term options contracts worthless. Despite significant premium losses, options traders remain actively engaged, with call volume outpacing puts, signaling continued bullish sentiment.
Investors are bracing for a significant price swing around the upcoming earnings report, with the stock having a history of declining post-earnings. A larger-than-expected move could be pivotal for options traders’ profitability.
The age-old options trading adage, "Sell a tiny, buy a Lamborghini," captures the essence of profiting from out-of-the-money options. However, for many traders betting on Nvidia (NVDA), the recent price action paints a starkly different picture, more akin to the losing side of that gamble.
As Nvidia's stock faced a significant downturn on Monday, shedding over 6.5% from its Thursday highs, a substantial number of short-term options contracts that were once in the money were rendered worthless. This volatility underscores the challenging environment for Nvidia's bulls as they approach the company's upcoming earnings report.
Nvidia, 5-day price chart.
Data from SpotGamma revealed that by midday Monday, over 15% of Nvidia's options volume consisted of contracts set to expire at the end of the session. Among the most actively traded were the 225 and 222.5-strike calls, which saw more than 220,000 contracts each and were poised to expire worthless after closing in the money on Friday. This mirrors Friday's session, where $114 million in premium was lost on 235-strike calls that moved out of the money.
Despite the recent headwinds, options traders remain heavily invested in Nvidia. The stock ranked as the fifth most-traded in the market on Monday, with over 3 million contracts changing hands, representing more than $1.3 billion in premium. A significant portion, $1 billion, was tied to call options.
While call volume on Monday outpaced puts by more than double, data from ThinkOrSwim suggested that a considerable number of these calls were traded at or below the bid price, indicating they were likely sold. Nevertheless, four substantial options trades, each exceeding $10 million, were placed by bullish buyers of expensive, in-the-money call contracts expiring on Friday.
Market participants are anticipating a notable price swing around the earnings announcement, with implied volatility suggesting a 6.25% move. This expectation, while typical for Nvidia's earnings, is considerably larger than the average realized move of 3.2%, according to Cboe LiveVol data. A larger-than-anticipated move could significantly impact options traders' positions.
For Nvidia's call option holders, a turnaround in the stock's post-earnings performance is crucial. The stock has seen declines following its last three earnings reports, including a 5.5% drop in February, presenting a recurring challenge for bullish bets.
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