Why Nvidia Dropped? What is a preferred trading?

Options may be the best destination.

$NVIDIA Corp(NVDA)$ released its earnings, which were very impressive, but not investor-friendly as the stock price experienced significant volatility after hours.

Q: What is Nvidia (NVDA) Q3 2024 Earnings Call Transcript Summary?

Both the earnings and guidance exceeded expectations by a large margin. One highlight was the data center revenue of $14.51 billion, surpassing the already elevated market expectations of $12.82 billion. The Q4 guidance for revenue is around $20 billion, while the market expectation is $17.9 billion. The only downside is that sales in the Chinese market are expected to "significantly decline."

After hours, the stock initially dropped by 6 points but then recovered. However, it is still better than experiencing a big jump followed by continuous downward movement. Looking at the one-minute after-hours trend, it is very difficult for ordinary investors to compete with institutions and quant traders in terms of speed. (Of course, if you have fast execution, congratulations!)

As for why the stock dropped, I believe in some of these explanations more:

The market already had "expectations" for the guidance to exceed expectations for this quarter and for measures to address the gap in the Chinese market. However, the key is that everyone has started considering the ultimate size of the data center business after the demand explosion in 2024 (which is why the stock price was anticipated in advance).

Institutions with pricing power may explore around the "ultimate size," which is why the NVDA stock price couldn't hold above 400 and couldn't rise above 500. Due to the high price, it is difficult for retail investors to participate, making options trading more cost-effective for NVDA.

I mentioned yesterday that if you bet on volatility for this earnings report, it may be difficult to profit. The majority of open call positions expiring this week are concentrated between $500 and $550, with the market betting on a rise of more than 10%. The open put positions are concentrated near $500. This situation is a "do or die" scenario.

Now, it seems difficult to achieve a 10% increase, so there is a high probability of both calls and puts expiring worthless.

Therefore, "shorting volatility" yesterday may be a better strategy (just like last quarter).

In fact, for stocks with such high prices, options strategies may offer better cost-effectiveness.

For example, a spread strategy (as a seller) targeting NVDA yesterday or an iron condor with wider ranges for selling positions can have a high probability of profitability. (The image below shows a reverse iron condor with positions at 460-470-530-540).

Generally, the margin for a spread with a $10 difference is $1,000, and the profit for one side is around $200, equivalent to 20%. For both sides, it is 40%. The high IV during earnings season can create such opportunities, and it's not bad during normal periods either.

Happy Trading!