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Today a Barchart report shows a large volume in near-term out-of-the-money (OTM) Nvidia Inc (NVDA) call options. This highlights a bullish play in NVDA stock around the time of its earnings release.
NVDA stock is trading at $117.75 per share today. The Barchart Unusual Stock Options Activity Report highlighted this call options activity.
It shows over 10,000 call options contracts have traded at the $220.00 strike price. The calls are due to expire in 44 days on August 30. That is just 2 days after the expected Aug. 28 quarterly earnings report release.
The price of the call options is 18 cents in the midprice. This is essentially a bullish play by the buyer of these calls. Their breakeven price is $220.18, over $102 above today's price, or 86% over the spot price.
Note that this 86% rise in NVDA needs to happen in just one and a half months for the buyer to reach a breakeven level. That is a very aggressive bullish play by the buyers of these call options.
On the other hand, it also provides a good income for the short-seller of these calls. For example, the 18 cents premium on the spot price of $117.85 provides a short-term yield of 0.153% (i.e., $0.18/$117.75).
Nevertheless, the buyers of these calls may not have to hold them up until Aug. 30. For example, even though they have no intrinsic value yet, the buyer may be counting on the stock rising as the earnings release date approaches.
For example, assuming that the stock rises by $20 between now and then, it's not unreasonable that the call options could rise by several dollars. One reason is that the implied volatility (IV) is very high at 77.74%. That means that the stock in essence is very volatile.
So, buying the calls at 18 cents and selling them for $2 or $3.00 before the options expire could be a speculative way to gamble in NVDA stock.
Should You Copy This Trade?
I have written about the underlying value of NVDA in previous articles. I discussed how the stock be worth significantly more in my June 17 Barchart article, “Nvidia Stock Could Be Worth $200 Per Share Based on Its FCF, +53% More.”
However, keep in mind that this could take up to a year for this price target to be reached. Moreover, that is lower than the $220 strike price in this unusual call option volume trade highlighted in the Barchart report.
Therefore, investors should be very careful to copy this call options activity. It is highly speculative, akin to just gambling. There is no basis in reality why this might work out in just 44 days. Let the buyer beware.
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.
