To The Moon

TL;DR: The $2 billion trader is likely not simply bullish, but rather engaged in an institutional options betting duel. However, their breakeven target prices have been surprisingly reasonable, worth considering as a reference.

Although it's been just two trading days since last Friday, May 24th, Nvidia's stock (NVDA) has surged an impressive 7.55%.

The $2 billion trader's first roll was executed at $1,047, while the second all-in roll occurred $100 higher at $1,147, just two days later.

Due to Nvidia's short-term explosive rally, this roll was conducted in three steps, unlike previous ones:

1. Tuesday, May 28th at $1,131 - Closed out 7,700 contracts, leaving 30,000 open

2. Wednesday, May 29th at $1,136 - Closed out 5,000 contracts, leaving 25,000 open

3. Wednesday, May 29th at $1,146 - Rolled the remaining 25,000 $NVDA 20240920 950.0 CALL$  into 22,000 $NVDA 20240920 1050.0 CALL$ 

After the roll, the new breakeven point shifted to $1,050 + $184.83 premium = $1,234.83. This means the options will remain profitable as long as Nvidia's stock price stays above $1,234.83 by September expiration.

Meanwhile, Nvidia's average trading price has also moved from $950 to $1,050 post-split. This suggests Nvidia is likely to oscillate around the $105 level going forward.

The $2 Billion Trader's Roll History

After compiling the 6 roll trades, it appears the $2 billion trader doesn't always profit:

Roll 1: $145M → $440M, left $225M → went all-in $216M

Roll 2: $216M → $297M, total $522M → went all-in $355M

Roll 3: $355M → $819M, total $986M → went all-in $788M

Roll 4: $788M → $678M, total $876M → went all-in $543M

Roll 5: $543M → $652M, total $985M → went all-in $625M

Roll 6: $625M → $851M, total $1.21B → went all-in $536M

The 4th roll from $820 to $880 actually incurred a loss of nearly $100M due to elevated volatility and time decay from the sideways chop.

Market observers undoubtedly get excited about each roll, but this recent one seemed unnecessary. The trader could've simply held the $820 calls through earnings for a bigger windfall.

Post-Squeeze, Institutions Stuck in the Trade

While the higher target price is celebrated, there were no apparent new bullish catalysts to justify the 10.5% surge over just 2 days.

After earnings, someone asked me what the $2B trader's roll strike would be, and I replied below $1,050. True to form, they rolled at $1,046.86, though not the day's high.

Based on my prior analysis, market makers were caught off-guard that day by the enthusiastic buying frenzy, triggering a mini-squeeze that propelled the close to $1,064.

Friday's massive options volumes then impacted Tuesday's trading. Out-of-the-money call open interest ballooned, with those upside strikes moving into-the-money this week. This forced institutions to scramble into stock to hedge their exposure.

So one can only guess what the institutions' effective cost basis is now?

I won't speculate much - let's say $1,050.

My overconfident self should've just gone all-in instead of writing this silly article.

Unlike meme stocks like GME susceptible to squeezes, with a large-cap like Nvidia, no one can really escape unscathed if things go haywire. $1,050 is pricey, but they're likely stuck holding and hoping valuations mean-revert over a few sideways months.

At least the options market offers plentiful premium harvesting tactics by continuously selling puts and calls to bleed time decay from the trapped longs.

The Overhead Supply Puzzle

Returning to the core issue, frequent rolling at elevated levels is unfavorable for the upside buyer. My prior blind spot from the $2 billion trader's windfall profits led me to assume it was just an individual or institution leveraging up for speculation, or at most, combining stock with options in a complex strategy.

However, it now appears this could actually be some form of inter-institutional options betting agreement. The two counterparties likely calculated a breakeven strike price, and are trading options at that level while hedging with the underlying stock.

That would explain why the strike prices seem so peculiarly reasonable, adjusting higher with each roll in line with market moves. The evidence shows these prices have indeed been fair, achieving their target levels at key inflection points.

Of course, the notion of a betting agreement is just my speculation without concrete proof.

The Risks Around $1,050

After deconstructing the origins of the $1,050 strike and the $2 billion trader's role, the next question is - can they profit this time? Can the stock reach $1,234.83 by September expiration?

In my view, it depends on the specific strategy - stock exposure may not be overly risky, but the option buyers face hazards.

This roll only involved 22,000 total contracts, far lower than the 37,700 from the post-earnings roll. The reduced capital allocated, around half, suggests they identified potential for slippage, especially given their penchant for rolling at highs.

So blindly chasing the $2 billion trader into upside calls here is inadvisable due to the elevated risk.

Of course, the situation remains fluid. As I'm writing, I'm noticing call option volumes starting to surge again this week.

Has the squeeze really ended? Could we break through $1,200 by this Friday's options expiration?

I'm certainly eager to see how Friday's open unfolds.