Fans of Nvidia Corp. may be hoping that the company will once again report strong results that will send its stock to all-time highs. The options market seems to be saying, “Don’t move so quickly.”
The semiconductor company, which is a stand-in for the AI boom, will release its fiscal second-quarter data after the market closes on August 28.
Bespoke Investment Group says that for the past six quarters, the company has raised its profit and sales estimates and given positive guidance.
Last week, the day after first-quarter results came out, the stock NVDA 4.55% rose 9.3% and closed at a new high. Also, the day after the fourth-quarter report, it went up 16.4% to a new high.
With the stock rising 4.5% to close Friday at $129.28, it would only need to rise a little less than 5% more to finish above the record high of $135.58 set on June 18.
On the other hand, the price of an options tactic called a “straddle” makes a three-peat look like a good bet. But if you knew more about how the crosses are priced, you’d know that the chances of a record after earnings were not very high.
Straddles are bets on the absolute value of how much a stock will move after an event. They don’t bet on which way the stock will move. They’re pretty much the same as an over/under bet on the number of goals scored in a football game.
Matt Amberson, principal at Option Research & Technology Services, said that straddles are priced for a $12.58 move in Nvidia’s stock the day after earnings. This is a 9.7% move from Friday’s close price.
If you look at the stock price right before the first-quarter report, the average move after earnings is $10.01, which is a 10.5% change.
If you bought a straddle on Friday at the closing price, you would start making money if Nvidia’s stock went above $141.86 or below $116.70.
But keep in mind that the options market works a lot like Las Vegas bookmakers. It looks at past and future volatility, the amount of time until an event, and demand to figure out how much investors might be ready to pay for a certain scenario.
Like the house in Vegas, the options market wins most of the time.
Christopher Jacobson, an analyst at Susquehanna, said that the suggested move of a straddle is the weighted average of all the possible moves based on different factors.
A recent look at the prices of more specific possibilities showed that the chances of Nvidia’s stock going up after earnings to $135 (just below the record high) were 25%, and the chances of it going up to $137.50 were 22%. Jacobson’s study used a spot price that was close to Thursday’s close.
The options market said that there was a 16% chance that prices would rise to $142.50, which is the point at which buyers of straddles would make money.
Straddles aren’t meant to be directional, but in the options market there is something called “skew” that means a bullish or bearish option may be a little more expensive than its opposite bet with the same conditions. This is because of demand.
Chris Jacobson, an analyst at Susquehanna, said that when it comes to Nvidia’s choices, “the skew continues to appear to be more to the upside.”
He said that options had put about an 8% chance of a 19% or more drop in prices after the earnings report and about an 11% chance of a 19% or more rise in prices.
