A Risky Options Trade to Navigate Nvidia’s Highly Anticipated Earnings Report
As Nvidia prepares to release its highly anticipated earnings report, investors are eager to see how the company’s performance will impact the overall stock market. The options market is buzzing with excitement and uncertainty, making it a risky game for traders.
The trade strategy being employed in this situation involves shorting shorter-dated options and going long on longer-dated options. The goal is to find a way to sell high options premiums, but it’s important to note that this isn’t a cheap trade by any means.
Nvidia has been a major player in the artificial intelligence industry, which has been the biggest investment theme of the past year. The company has seen significant growth, with its stock up nearly 47% year to date and about 240% over the past 52 weeks. It’s no wonder that Nvidia’s valuation is measured in trillions.
The AI boom is not just hype, as evidenced by Nvidia’s impressive $18.1 billion in revenue for the quarter that ended in October 2023. This represents more than 200% growth from the previous year. The demand for Nvidia’s products is extraordinarily high, with some of its higher-end consumer GPUs fetching prices well above the list price on eBay. To meet this demand, the company raised prices and saw its net income margins grow accordingly. Analysts anticipate that the company’s net income margins will have doubled from around 26% in the previous fiscal year to a projected 52% when Nvidia reports this fiscal year-end.
Despite these positive indicators, there is concern that the stock’s valuation may have already priced in all of the future good news. At 30 times revenue, there may be limited room for further capital gains. This steep trajectory has some experts, like CNBC’s Carter Braxton Worth, cautious about the upcoming earnings report, referring to it as “a coin toss.”
The options market confirms the level of uncertainty surrounding Nvidia’s earnings. Options imply that the stock could potentially swing about $80 higher or lower by the end of the week, representing an 11% potential fluctuation. In terms of market cap, this translates to about $200 billion.
So, what’s the best course of action for investors? One approach is to have a position in Nvidia that is not necessarily directional. In this case, the strategy involves shorting shorter-dated options and going long on longer-dated options to capitalize on selling high options premiums. Another option for stockholders is to sell upside-covered calls against their long equity position. Those hoping to buy the stock at lower prices can consider selling cash-covered downside puts.
However, it’s crucial to note that these trades are not for the faint of heart. They come with significant risks and are better suited for more speculative and experienced traders and investors. For example, one spread trade could require an outlay of nearly $6,000, which is not a small amount. With that kind of money, one could buy only eight shares of Nvidia, representing roughly $99 in total revenues if the Street consensus is accurate.
In conclusion, Nvidia’s earnings report is a critical moment for the company and the stock market as a whole. Depending on the results, it could have far-reaching implications. Investors need to carefully navigate the options market and make informed decisions based on their risk tolerance and market outlook.
Analyst comment
Neutral news. The market reaction to Nvidia’s earnings report is uncertain due to the high anticipation and risks involved in options trading. Analysts expect strong performance based on Nvidia’s growth in the AI industry, but there are concerns about the stock’s valuation. Traders should approach with caution and consider strategies such as shorting shorter-dated options or selling covered calls.
