NVIDIA's Earnings Report is Here! How to Execute a Short Strangle Strategy?

Post-Market on November 20th (Eastern Time), AI Chip Giant NVIDIA (NVDA.US) to Announce Q3 FY2025 Results
Since OpenAI released ChatGPT in November 2022, $NVIDIA Corp(NVDA)$ stock price has been skyrocketing. Since then, NVIDIA's share price has surged over 800%, with its market capitalization exceeding $3.5 trillion, surpassing Apple to become the most valuable company in the world and securing its place in the Dow Jones Industrial Average.

Q3 FY2025 Earnings Forecast
Market expectations indicate that NVIDIA is likely to achieve $33.028 billion in revenue, representing an 82.27% year-on-year growth, with earnings per share (EPS) estimated at $0.70, up 88.11% year-on-year. This would mark the sixth consecutive quarter of record-breaking revenue and profit.

According to Bloomberg's consensus estimates, NVIDIA's most crucial business segment, the data center division, is expected to achieve $29.083 billion in revenue, growing by 100.38% year-on-year. This would further expand the segment's revenue share within the company to 88.06%, up from 87.5% in the previous quarter.

Market Volatility and Historical Trends

Some investors appear to be preparing for significant market volatility. Current data shows that NVIDIA's implied price movement is ±8.2%, reflecting the options market's expectation of an 8.2% single-day post-earnings swing. For comparison, NVIDIA's average price change over the past four quarters after earnings was ±8.6%.

Looking back at the last 12 earnings days, NVIDIA's stock rose 67% of the time, with an average price movement of ±8.3%. The largest gain was +24.4%, while the largest drop was -7.6%. Over the past seven quarters, the price swings were as follows: +14%, +24.4%, +0.1%, -2.5%, +16.4%, +9.3%, and -6.4%.

Investor Strategies for Earnings Season
Investors with differing expectations for NVIDIA's stock performance can employ various strategies:

• Cautiously bullish: Collar strategies.

• Directional betting: Spread strategies.

• Shorting volatility: Wide strangle strategies.

Shorting Volatility Strategy: Wide Strangle
For investors uninterested in predicting NVIDIA's price direction but aiming to profit from volatility, historical data from the past five earnings days shows an average price movement of ±8.6%, with the largest gain at +24.4% and the largest drop at -7.6%.

Based on these patterns, investors can use a short volatility strategy. With NVIDIA's current price at $147.7, investors could bet the stock remains between $131 and $170 after earnings.

1. Sell a Put option with a strike price of $131

   • Receive a premium: $107

   • Obligation: If the price falls below $131, you must buy the stock at $131.

2. Sell a Call option with a strike price of $170

   

   • Receive a premium: $56

   • Obligation: If the price rises above $170, you must sell the stock at $170.

Strategy Composition

• Total premium income: $107 + $56 = $163

• Profit/Loss Scenarios:

  1. Stock below $131: The Put is exercised; you buy at an effective price of $129.37 ($131 - $163). Call expires worthless.

  2. Stock between $131 and $170: Both options expire worthless; total profit is the premium income of $163.

  3. Stock above $170: The Call is exercised; you sell at an effective price of $171.63 ($170 + $163).

• Max Profit: $163 (if stock stays between $131 and $170).

• Breakeven Points:

  • Lower: $129.37 (below this, losses occur).

  • Upper: $171.63 (above this, losses occur).

• Potential Risk: Losses arise if the stock falls significantly below $131 or rises sharply above $170 due to Put and Call obligations.

Suitability
This strategy suits investors confident in NVIDIA's price staying within the $131–$170 range by expiry, with the ability to handle potential risks.