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Nvidia (NVDA) stock is up again today, giving it a month-to-date performance of 47.8% and a YTD return of over 180% at $410 midday on May 30. That makes it the ultimate FOMO stock and is pushing its call premiums sky-high.
In fact, just two weeks ago we wrote about how high NVDA stock had climbed and suggested that shorting its out-of-the-money puts would be advantageous. The article, “Nvidia Stock Is Up Over 103% YTD - Making Shorting Its Puts Attractive For Income Plays,” recommended shorting the $270 strike price puts for expiration on June 9.
At the time they were trading for $5.15 per put, but now two weeks later they are at 2 cents. That is a great return for the income investor, but obviously, anyone who had bought calls or held the stock did much better.
Options Skewed to the Call Side
Today, it is the NVDA call options that have huge premiums. Option prices are heavily skewed to the call option side, as virtually no one believes that NVDA stock is due to stop climbing any time soon. That makes it the ultimate FOMO (fear of missing out) stock.
For example, for the same June 9 expiration period, call options that are about 10% out-of-the-money (OTM)are worth more, i.e., trading at higher premiums, than 10% OTM put options. This can be seen by comparing the $455 call strike price with the $365 put strike price. In the first case, the $455 call option, 10.96% higher than the spot price, trades for $5.78. By contrast, the $365 strike price puts, 10.99% below the spot price, are at $1.94.
In other words, for the same relative distance away from the NVDA market price, calls are 2x the price level than puts (i.e., $5.78/$1.94 = 2.98-1 = 2x).
Where This Leaves Investors In NVDA Stock
If you have ridden NVDA stock up so far, you are probably looking at taking profits. One way to do this and still have some upside is to sell covered calls. For example, by selling the $455 call options by entering in an order to “Sell to Open” 1 call contract (assuming you have 100 shares of NVDA stock) your account will receive $578. That works out to an immediate yield of 1.40% (i.e., $5.78/$410.00).
In case you don't have 100 shares, your brokerage firm may allow you to enter an order to buy 1 call at $450 as well, $5 below the $455 shorted call price. The difference in price between these could potentially be made up by shorting a close to the money put option.
For example, the $390 put strike price trades for $6.43. If an investor shorts these puts he could make up for the 50 cents to $1.00 price difference between the call spread. This is known as a Jade Lizard strategy, and also a “poor man's” covered call.
Nevertheless, investors should be extremely leery here about falling into the trap of buying call options in a long bet. The stock has moved so far, so fast that it makes the possibility of a pullback extremely likely.
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.
