Nvidia’s recent earnings reports devastating for options traders

Nvidia, a prominent chip designer, has seen its recent earnings reports wreak havoc on options buyers. Scott Murray, an experienced options trader who operates the Smashing Volatility Substack, recently released an insightful analysis of Nvidia’s upcoming earnings report scheduled for release after Wednesday’s market close. Over the last 12 financial quarters, Nvidia has consistently yielded earnings reactions that were less dramatic than what was implied by options pricing, especially during the most recent two reports.

Murray noted that unlike Tesla, which frequently surpasses the expected straddle price, Nvidia tends to move in the opposite direction. Following the earnings announcement, Nvidia typically opens higher in the subsequent trading session but often retraces a significant portion of those gains. This behavior is attributed to the vast array of derivatives linked to Nvidia, resulting in the accumulation of a substantial amount of premium in the options market. In anticipation of spikes in Nvidia’s stock price, some traders may resort to implementing call yield strategies overlaid on their long positions, while others holding long calls may opt to sell their positions.

After Nvidia’s earnings report in August, the stock concluded the week very close to the “max pain” threshold for options buyers, representing the point at which the greatest notional value of options would expire as worthless. With the highest call open interest positioned at the $140 strike for this Friday’s options expiry, breaking through and sustaining gains above this level following a positive earnings surprise could prove to be a challenging task for Nvidia.

Initially, the options market appeared to underestimate the potential magnitude of Nvidia’s post-earnings price movement, displaying a sense of complacency. However, in the days leading up to the earnings event, implied expectations for Nvidia’s stock reaction post-earnings have intensified. The swirling dynamics of the derivatives market surrounding Nvidia have heightened the anticipation and uncertainty regarding the post-earnings stock performance.

In conclusion, Nvidia’s earnings announcements have consistently delivered results that fall short of the options market’s anticipated moves, posing challenges for options buyers. The intricate web of derivatives trading surrounding Nvidia has further complicated the stock’s post-earnings price action, creating an environment of heightened volatility and uncertainty for traders and investors alike.