Ahead of their earnings report on Wednesday after the close, NVIDIA (NVDA) volatility is bid up in the short-term. Options are currently implying a 5.8% 1-day move for the report, which compares with the 4.7% average move over the last 4 reports. While NVDA shares have rallied two times and declined two times over those previous four reports, the average gain has only been 1.9% while the average decline has been a much higher 7.4%. Not only is the weekly volatility elevated to reflect the earnings, but I am also seeing a bid to 1-month (Sept) volatility as well. Looking at the 5% upside call vol, it not only has risen by ~ 40% from the June lows but it now trades at just below its highest premium to 30-day realized volatility.
1-month (Sept) 5% upside call implied vol is up 40% from the June lows and now trading near richest skew to 30-day realized vol (bottom chart)
Besides screening “rich” to realized vol, and recent bias to either muted or downside reactions to earnings, I believe there are several compelling reasons why selling upside calls against an existing long NVDA equity position makes sense ahead of earnings:
1. NVDA is up more than 105% from the April lows into the report – that advance represents ~ $2 trillion in market cap gains as well. While you typically don’t want to bet against NVDA, it appears a lot of good news is currently being represented in the shares.
2. NVDA now trades at less than a 10% discount to the street’s current 12-month PT of 195 – NVDA has only traded at/above the street’s 12-month PT once over the last 18 months (June ’24). That marked a short-term high for shares for the better part of four months
3. NVDA short-interest is at a 5-year low – Short interest is down 50% from the 2023 highs and is now at a 5-year low. This also likely speaks to perhaps a lot of good news already being priced into shares at current levels and far less likelihood of a short squeeze post earnings
Trade:
Sell NVDA Sept 19th 190 calls @ $4.05 (NVDA 178 price ref)
Trade Details:
- Selling the 6.7% upside September calls ahead of earnings this Wednesday
- Shares are up 105% off their April lows and just below the recent highs ~ 184.50
- Call sale yields 2.3% (33% annualized) with an upside breakeven ~ 194 (9% higher and just below the street’s current 12-month average PT)
- Recent moves on earnings have either been muted to the upside or decidedly lower (another reason why I favor the upside call sale)
- 1-month implied vol is up 40% from the lows and trading at a substantial premium to 30-day realized vol
- Can do trade against a portion of existing long position
- Please contact me or the 22V sales desk for updated pricing and execution capabilities
