Huge, Unusual Put Options Volume in Nvidia

Today, a large volume of in-the-money (ITM) Nvidia Inc. (NVDA) put options traded for expiry in 12 days. Are investors bearish or bullish on NVDA ahead of earnings next month?

NVDA is down about 2% in midday trading at $207.18. That’s up from a recent low of $192.53 on June 26, but down from a May 14 peak of $235.74. However, last quarter, the stock hit a low of $165.17 on March 30, about 20% lower than today’s price. Could it hit this low again?

More News from Barchart

I recently pointed out in a Barchart article (July 12) that NVDA has been trading in a range, and it makes sense to short out-of-the-money (OTM) puts.

So, are these in-the-money (ITM) put option buyers fearful that NVDA could move towards the last trough price?

Unusual NVDA Put Options Volume

A Barchart report today shows this large volume of NVDA ITM puts. The Barchart Unusual Stock Options Activity Report today shows that the volume is almost 32x the prior number of contracts outstanding for one particular Nvidia put option contract expiring in 12 days.

There have been over 5,700 contracts traded at the $210 put option strike price for expiry on July 27. This strike price is higher than the trading price, so the puts are “in the money” (ITM) and could potentially be assigned to the short-seller.

However, the premium in the report was $6.15, and right now it is at $6.25. That means a buyer of these puts hopes that NVDA will fall below $203.75 ($210-$6.25), but a short-seller would have a $203.75 breakeven buy-in point. That is $3.43 (-1.65%) below today’s price ($207.18).

Moreover, the short-seller gets to keep the $6.25 premium no matter what happens. That represents a 2.98% yield on the $210.00 purchase price. 

Nevertheless, buyers of these puts believe the stock will continue to fall below $203.75, down just 1.5%, over the next 12 days. Moreover, even at that price, there could be some extrinsic value, and the put option could rise above $6.25.

What is likely to happen?

Forecasting NVDA Stock Price

In the short term, there is no way to predict this confidently. However, I showed in my July 12 article that NVDA is worth considerably more over the next year (“Nvidia Stock Has Been Flat, But NVDA Price Targets are Higher“).

Based on free cash flow (FCF) projections for the next 12 months, analysts’ revenue forecasts, and a 25.5x FCF multiple, it could be worth $309 per share.

Moreover, Wall Street analysts’ price targets (PT)  range from $298.20 (AnaChart), $301.62 (Yahoo! Finance), to $302.55 (Barchart).

In other words, there is strong upside based on what analysts are forecasting. The average PT of $300.79 (not including mine) is over 45% higher than today’s price.

Moreover, if Nvidia’s upcoming earnings release, due out on Aug. 19, is strong, including high FCF margins and a strong revenue outlook, the stock could rally.

Conclusion

But these are all longer time frames than the next 12 days, when the huge volume of unusual ITM put options expire. The higher PTs and earnings release won’t help investors in these puts.

As a result, investors should be cautious in copying this trade. It is likely initiated by institutional investors. They may be hedging their bets, including with offsetting paired trades, or limiting any downside exposure in their long NVDA stock holdings.

The bottom line is that this is a highly speculative bet. Investors should be careful in mimicking this trade, as it could lead to substantial loss, especially for put option buyers.

On the date of publication, Mark R. Hake, CFA 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. This article was originally published on Barchart.com