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Mark R. Hake, CFA

Nvidia Stock Refuses to Fall - Making Its Puts Attractive to Short Sellers

Nvidia (NVDA) stock still has not corrected, despite a massive 62% move up in the last 3 months. As of early trading on Aug. 1 NVDA stock is at $467.54, up from $289.10 on May 1. That makes its put options very attractive to short sellers, given how high put premiums are now.

We discussed this situation in a recent article on July 19, “Nvidia Stock Surges Again - Attracting Unusual Stock Options Activity.” A Barchart Unusual Stock Options Activity Report showed that large institutional trading activity had occurred in NVDA puts at the $460 strike price for the expiration period ending Aug. 25. At the time, NVDA stock was at $474.94.

So, although NVDA stock has dropped $7.36 since then, that represents a dip of just 1.55%. As a result, the put premium has not moved much. For example, on July 19, the $460 strike price put was trading at $26.85, but today this same put is at $27.83.

NVDA Puts - Expiring Aug. 25 - Barchart - As of Aug. 1, 2023

In other words, if the institutional investors were shorting that put in mid-July they haven't lost much. Moreover, unless NVDA drops by another $34.39 or 7.36% by Aug. 25, these traders shorting those puts are going to make good money.

This is because the short put traders collected $26.85 shorting the $460 strike price, i.e., a 5.836% yield. So, their breakeven price was $433.15 (i.e., 7.36% below today's spot price.).

Moreover, going forward, traders can short new near-term out-of-the-money (OTM) puts with very high premiums and effective yields.

Shorting OTM Puts Ahead of Earnings

Nvidia will report its fiscal second-quarter earnings for the quarter ending July 31 on Aug. 23. So put premiums after that will reflect investor sentiment on whether the stock will rise or fall after that announcement.

For example, if investors feel that NVDA stock will have a “sell on the news” reaction, its lower strike prices will have higher put premiums. Short sellers can take advantage of that fear by shorting these high premiums.

For example, the Sept. 1 expiration period, one month from now, shows that the $450 strike price puts trade at $23.73. That represents a very high yield of 5.27% for just one month until expiration.

NVDA Puts expiring Sept. 1 - Barchart - As of Aug. 1, 2023

This strike price is just 3% below today's price. More conservative investors might want to sell short strike prices deeper out-of-the-money (OTM). 

For example, the $425 strike price for Sept. 1 trades at $14.33. That represents a still very high yield of 3.37% (i.e., $14.33/$425.00).

In other words, an investor who secures $42,500 in cash and/or margin with their brokerage firm can then enter an order to “Sell to Open” 1 put contract at the $425.00 strike price for expiration on Sept. 1. Then the account will immediately receive $1,433 (i.e., $14.33 x 100 shares in 1 put contract). This is why the yield is 3.37% (i.e., $1,433/$42,500 invested).

Moreover, the conservative investor has a very low breakeven price. NVDA stock would have to fall to $410.67 (i.e., $425.00 strike price - $14.33 premium received). That is a drop of about 12% below today's price before there would be any unrealized loss. 

And even in that case, the investor would still get to own 100 shares of NVDA at a very low effective buy-in price. They could then turn around and sell short OTM covered call options in future expiration periods in order to make up any of the unrealized loss.

This shows that NVDA put premiums are very high right now. Short sellers can decide what strike price provides them with a conservative risk profile. In any case, they stand to make high yields with good downside protection.

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. For more information please view the Barchart Disclosure Policy here.
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