Nvidia’s Earnings Are Coming. How to Protect Against a Loss

Nvidia earnings are coming, with the danger that the results won’t be spectacular enough to send prices higher. They could bring a loss.

An options “collar” strategy can protect some of Nvidia shareholders’ recent gains.

While Nvidia’s financial performance and share-price gains have been incredible, more big gains seem almost too good to be true. For investors feeling a little nervous headed into the earnings news—and who don’t want to just sell their Nvidia positions—options markets are offering an inexpensive way to buy some protection.

For its fiscal fourth quarter, due to be reported on Feb. 21, Wall Street expects Nvidia to report earnings per share of $4.57 from sales of $20.3 billion, according to FactSet. A year ago, Nvidia reported EPS and sales of 88 cents and $6.1 billion respectively.

Earnings growth is expected to be north of 400% year over year. Sales are expected to expand at a rate well above 200%.

Growth like that has propelled shares up about 220% over the past 12 months, taking Nvidia’s market capitalization to more than $1 trillion.

“We expect another strong print but think investors have largely priced in this near-term upside,” wrote Susquehanna analyst Chris Rolland in a Wednesday report previewing the results. “With size of the beat the real debatable point.”

It can be dangerous for any stock—even Nvidia—when investors expect results to come in far ahead of forecasts. That raises the risk that even strong numbers can disappoint the market.

So Rolland’s colleague, Susquehanna options strategist Christopher Jacobson, came up with an idea to project some of the recent gains at an attractive price. He recommends a stock options collar. That is a strategy that involves owning the stock, selling out-of-the-money call options, and buying out-of-the-money put options.

A stock option gives the holder the right to buy or sell a stock at a fixed price at a date in the future. A call option is the right to buy, while a put confers the right to sell. An option is out of the money if the price where the option can be exercised—the strike price—is higher than where the stock is trading in the case of a call option, or lower than where the stock is trading in the case of a put option.

The collar he suggests is selling a call that expires in March with a strike of $865, up about 20% from recent levels. Investors could take that money and buy put options that expire in March with a $630 strike, about 13% below recent levels.

That has the effect of capping the upside in the stock at 20% between now and the options’ expiration while limiting the potential loss to 13%. Nothing happens if the stock remains between $630 and $865 in the weeks after the earnings. The insurance policy, essentially purchased free, expires unused.

Getting protection like that for nothing is a little unusual. Put options are typically a little more expensive than call options, all else being equal, because “more can go way wrong than way right,” Jacobson said. It reflects the fact that it is human nature to look for the next disaster.

Options trading can be complicated. Investors should be sure they know what they are doing, or have solid advice, before piling in.

But in moderation, options are a useful tool. They can do a lot of things, like offering safety in a volatile stock.