To The Moon

Will $Nvidia(NVDA)$’s much-awaited earnings report on Wednesday reignite the AI trade?

Investors are positioning for another big run in the graphic-chip maker’s stock following the report.

The composite implied volatility of NVDA options soared to 94.9 ahead of earnings, up around 60% from a month ago.

Source: Market Chameleon

Nvidia Options Are Somewhat Expensive

The spikes in implied volatility are mostly related to earnings announcements. As the chart shows, the options are beginning to jump higher in terms of implied volatility. The stock price often gaps after the earnings because there are some surprises in the earnings report.

Nvidia's dominance in the AI-driven technology trade has turned its earnings into a barometer for overall market sentiment, and its influence on the stock market is unparalleled.

Traders buy the options that are going to expire right after earnings in hopes that a large move will occur. They are trying to gauge the size of that gap move on the earnings. The succeeding option expirations are also inflated in price, but the largest implied volatility is in the series that expires immediately after the earnings report.

However, Nvidia options are somewhat expensive heading into earnings. About $504 billion in Nvidia options premium, the price of an options contract, has changed hands this year, according to Cboe data. That is more than the combined sum for Apple, Amazon.com, Alphabet, Advanced Micro Devices and Meta Platforms.

Source: Cboe Global Markets

In the past five quarters, while earning per share has surpassed market consensus in all cases, the changes in price per share have been varied. Not all earnings beat resulting an increase in price, as two times the stock went down instead.

Source: GuruFocus

A Strategy For Hedging The Nasdaq Impact

The options market expects a bigger stock-market move from Nvidia’s earnings than upcoming jobs numbers, inflation data, or the Federal Reserve meeting.

In a note on Sunday, Bank of America analysts led by Gonzalo Asis flagged how this company-specific event is also “a very big deal for the broader market.”

“The implied move for the S&P 500 on that day has been fluctuating with Nvidia’s own earnings implied move,” they write. “And options are assigning more broad market risk around Nvidia earnings than around next month’s non-farm payrolls and CPI days, and as much as the December FOMC.”

In other words, the options market is calling this the most important event left this year. 

Source: Bank of America

Despite the potential need for hedges, the bank also noted that hedging NVDA earnings directly is not cheap, considering how significantly the stock has reacted to its last few earnings reports.

For the Friday expiry in particular, there’s far more open interest in out-of-the-money calls than out-of-the-money puts. Combined with the relative pricing of these options — a 5% out-of-the-money call has a higher implied volatility than a 5% out-of-the-money put option — this implies traders are optimistic on the outcome of Wednesday’s big event. 

Bank of America’s team, however, sees opportunities on the other side of the trade.

“Given single stock fragility on the rise and easing post-election euphoria, we find it sensible to hedge the potential added impact on the broader market in case Nvidia disappoints,” they conclude.

Source: Bank of America

For traders seeking to hedge the broader market risks tied to Nvidia’s performance, Bank of America recommended an option strategy using put spreads on the Nasdaq-100 ETF, the $Invesco QQQ Trust(QQQ)$. Specifically, the QQQ 22 Nov 490-480 put spreads are priced at around $0.5.

Source: Tiger Trade App