Nvidia bulls mount uphill battle into earnings
There’s a popular saying in the option pits: Sell a tiny one, buy a Lamborghini.
He is, of course, referring to the practice of out-of-the-money options, selling dollars cheaply and collecting a premium for a high-probability bet. As those little ones grow, you’ll earn a small fortune over time. Of course, there is also another side to this; o investors buying worthless options.
Nvidia Monday’s price action is a good example of this concept.
Options traders at Nvidia are bracing for another rough session as shares tumble on Monday, dropping more than 6.5% from Thursday’s peaks and making some of the most popular short-term contracts worthless again.
Nvidia, 5 days
More than 15% of Nvidia options traded through midday Monday were contracts expiring at the end of the session, according to data compiled by SpotGamma. The most popular contracts included the 225 and 222.5 strike calls, which each traded more than 220,000 times and will expire worthless after the close of the money on Friday. This is a repeat of Friday’s session, when $114 million in premiums went out of the money on 235 strike calls.
Despite the weakness, the bulls do not seem afraid. Nvidia options were the fifth most traded option in the market on Monday, trailing benchmark indexes and Tesla, with over 3 million contracts traded and total premium exceeding $1.3 billion. $1 billion of this was tied to calls.
Call volume more than doubled on Monday, but there were more calls at bid or below, meaning it was likely sold, according to ThinkOrSwim data.
Yet the four biggest options trades on the stock were all bullish call buyers on expensive, in-the-money contracts that are worth at least $10 million each and will expire on Friday.
Based on implied volatility in earnings, investors are expecting a 6.25% swing, on par with usual expectations but larger than the average realized move of 3.2%, according to Cboe LiveVol data. A bigger move than expected could save option traders a large amount of money.
Those with call contracts will need a change of pace: Nvidia has fallen after the last three reports, including a 5.5% decline in February.
