Institutions Preemptively Roll Covered Calls, Nvidia Faces $118 Resistance
$Nvidia (NVDA)$'s pullback on Tuesday was unsurprising, but what caught me off guard was institutions rolling their covered calls already, when typically they'd wait until Thursday or Friday for premium erosion:
Closing $NVDA 20240906 126.0 CALL$
Opening $NVDA 20240913 118.0 CALL$ overwrite
For the 0913 118 calls, I expect they'll look to close before expiration once the price is favorable, rather than holding to expiry. So theoretically, Nvidia's closing price in the week of Sep 13th doesn't necessarily need to stay below $118.
Or does it?
With the Sep 20th monthly options expiring, the Sep 13th close will likely gravitate towards those monthly strikes. Based on current open interest and stock price, the strikes capping upside appear to be $120 and $116.
So a close below $120 next week is quite plausible for the max pain equilibrium.
As for downside, $100-105 remains a likely floor for now. But with $SPY$ still not having corrected enough, a dip towards $90 for Nvidia to burn some put premium is reasonable as well.
Tuesday's put volumes showed much more rational sizing compared to Friday's paltry, non-committal strikes like the 80 puts.
One noteworthy flow was a seller of the $NVDA 20241011 90.0 PUT$ - a single-leg, naked put overwrite establishing a new position.
Overall, Monday saw very active single-leg trading, including buyers of the $NVDA 20240906 103.0 PUT$ , the aforementioned 90 put seller, and buyers of the long-dated $NVDA 20250815 110.0 PUT$ as well.
These flows don't necessarily conflict - they align with establishing defined risk positions around the expected $90-130 trading range. Personal risk preferences will dictate optimal strike selection.
There was also ample activity in shorter-dated call overwrites, like the $NVDA 20241004 106.0 CALL$ and $NVDA 20241004 100.0 CALL$ sellers.
It's worth noting that short call overwrites require more active management to capture profits compared to cash-secured put overwrites which can often be held through expiration.
Nvidia wasn't alone either - $Coinbase (COIN)$ also saw institutions roll lower with the $COIN 20240913 190.0 CALL$ and $COIN 20240913 195.0 CALL$ overwrites.
Overall, risk assets are retreating as the market potentially gets ahead of itself in pricing in a "soft landing" scenario. It's palpable bearishness across the board.
My plan is to look at adding a new $NVDA$ put overwrite on Thursday, as Friday's nonfarm payrolls release could catalyze a sharp reversal in market sentiment. Staying nimble for these momentum shifts will be key in managing any volatility expansion.
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