Nvidia (NVDA) reported Q1 2027 results after Wednesday’s close. As expected, they were excellent. Unfortunately, in pre-market trading this morning, NVDA stock has barely moved.
Year-to-date, Nvidia’s stock has gained nearly 20%, while it’s up 70% over the past 12 months. For most stocks, that would be an unbelievable performance. However, for the world’s most valuable company at $5.41 trillion, expectations for the stock are through the roof.
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The same holds for the company’s financial performance. For most businesses, generating $48.55 billion in free cash flow in a single quarter would be jaw-dropping; for Nvidia, investors view that as par for the course. They expect more.
“‘The market demands perfect from the largest company in the world,’ wrote Ryan Lee, the senior vice president of product and strategy at ETF provider Direxion,” MarketWatch’s Emily Bary reported Lee’s comments.
Jensen Huang has been one of my favorite American CEOs for many years. It doesn’t surprise me that Nvidia is the top dog among public companies.
“Of the three stocks mentioned, Nvidia (NVDA) would be the stock I’d most likely hold for the next decade or more. CEO Jensen Huang is just so darn smart and not afraid to make big bets like the one it’s made on artificial intelligence,” I wrote about Huang in September 2023.
But I digress.
Today’s commentary is about unusual options activity from yesterday’s trading. Interestingly, while Nvidia’s share volume was higher than its 30-day average, its options volume was about 22% less.
Despite the lower volume, Nvidia had plenty of unusually active options to zoom in on.
Beyond Short-Dated Options
I got the idea for today’s piece from a CNBC article from yesterday about positive skew. In it, contributor Michael Khouw highlighted a peculiarity in yesterday’s Nvidia options: calls were trading at a premium to puts just hours before Nvidia would report its Q1 2027 results.
Typically, puts trade at a premium because investors value downside protection above all else. In this case, investors expected Nvidia shares to gain a little more than 6% in 2.5 trading days to Friday’s expiration.
Khouw offered up two trades: 1) a Protective Collar, and 2) a Bull Call Spread, both with calls expiring tomorrow, and both with limited risk profiles.
While I get the reasoning behind the two bets, I don’t use short-dated options, opting for those expiring in seven days or more.
Using this criterion and yesterday’s unusual options activity for Nvidia, I’ve come up with one trade for a protective collar and another for a bull call spread.
The Zero-Cost Protective Collar - 29 DTE
The Vol/OI (volume-to-open-interest) ratios for both of these calls aren’t high, but they meet the criteria -- at least 500 in volume, DTEs of 7 days or more, and a Vol/OI above 1.24 -- so we’ll use them as the income part of the protective collar.
Meanwhile, the $207.50 put is the highest strike price expiring in 29 days, and the call can cover the put’s cost.
Of the two calls, the instinctive choice would be to go with the higher strike, generating a net credit of $0.25 from selling the call for income [$4.90 bid price] and buying the $207.50 put [$4.65 ask price], while gaining $10 in potential upside.
Here’s what the five calls look like from $232.50 to $242.50.
As you can see from above, the $242.50 call has an upside of 8.63%, 160 basis points higher than the downside, while the upside for the $232.50 call is actually less than the downside.
But before opting for the $242.50 call, consider that the probability of maximum profit for the $232.50 call is 37.8%, 980 basis points more than the probability of maximum loss. That compares to a probability of maximum profit of 26.0% for the $242.50 call, 200 basis points less than the 28.0% probability of maximum loss.
In this example, the net credit of $3.15 for the $232.50 call outweighs the higher strike price. Here’s the calculation:
1) $232.50 strike price - $223.47 share price + $3.15 net credit = $12.18 maximum profit
2) $242.50 strike price - $223.47 share price + $0.35 net credit = $19.28 maximum profit
Even though the maximum profit for the $242.50 strike is 58% higher, the likelihood of the share price appreciating to that level is much less likely than for the $232.50 strike.
The Bull Call Spread - 23 DTE
The bull call spread is a bullish bet that the share price will move higher by expiration in 23 days. It involves buying one long call and selling a second short call with the same expiration.
Based on the long $215 call and $270 short call, the information directly above is how it looks in Thursday morning trading instead of yesterday’s close. So, yesterday at the close, your net debit would have been $14.44; today, it’s $12.49.
As the CNBC article pointed out, you’re making a defined-risk, asymmetric trade that offers more upside than downside. In this example, the percentage return based on a maximum profit of $42.51 [$270 strike price - $215 strike price - $12.49 net debit] is 340.35%. That’s 5,647% annualized. Put another way, for every $1 of potential profit, you’re risking 29 cents.
The best part?
If Nvidia’s share price doesn’t move a penny, you’re out $4.92 ($492) [$227.49 breakeven - $222.57 share price] or just 2.2% of its share price. However, if the shares move up by the expected move of $15.21 to $237.78, you make $10.29 [$222.57 share price + $15.21 expected move - $227.49 breakeven], a 4.6% return (76% annualized).
While most investors new to options would probably bristle at the idea of being happy with a $1,249 loss on a bet, both of these deliver more upside than downside, which is precisely the definition of asymmetric risk/reward.
Nvidia is the rare stock that gives you this opportunity.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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