Betting on Nvidia: Can Options Traders Profit Amid Earnings Uncertainty?

It’s arguably the biggest question of the week: does Nvidia (NVDA) have what it takes to deliver yet another strong earnings beat, this time for its fiscal second quarter? There are compelling arguments on both sides of the aisle for where NVDA stock may head next. However, those who are still hesitant may consider a relatively simple options trade.

On Wednesday, Nvidia is scheduled to disclose its fiscal Q2 2025 results, with the consensus view among analysts calling for earnings per share of 64 cents. In the year-ago quarter, the tech giant – which manufactures advanced graphics processors that undergird artificial-intelligence-related protocols – posted EPS of 25 cents.

On the top line, analysts are forecasting sales of $28.68 billion, with a high-side view of $30.45 billion. Last year, the company reported revenue of $13.51 billion, easily beating the consensus estimate of $11.19 billion. The anticipation couldn’t be any hotter.

Evidence exists to support the claim that Nvidia will once again deliver the goods. Over the past four quarters, the average earnings surprise has clocked in at 18.18%. Fundamentally, the global AI ecosystem could be worth over $1.81 trillion by 2030, per Grand View Research. If so, that would represent a compound annual growth rate of 36.6% from 2024.

However, investors must also be awre of the risks involved. Since Q2 of last year, Nvidia’s earnings surprise has faded from 31.6% to 9.8% in Q1 of this year. After closing at an all-time high in June, NVDA stock has had trouble breaking new ground. So, even with analyst optimism, investors need to be cautious about the opportunity.

Unusual Options Activity is Unusual Indeed for NVDA Stock

Speaking of being cautious, perusing Barchart’s unusual stock options volume is a good step in potentially deciphering the mindset of top traders. While the screener doesn’t guarantee anything, it indicates what equities the big dogs are eyeballing – or not eyeballing. Interestingly, NVDA stock fell into the latter category.

Following Monday’s close, total volume for NVDA options landed at 2.22 million contracts against an open interest reading of 26.28 million contracts. This figure represented a 50% downgrade from the trailing one-month average volume. However, call volume reached 1.39 million contracts compared to 829,361 contracts for put volume.

Such a massive reduction in derivative market participation is unusual, especially on the eve of an earnings report. It’s difficult to understand the thought process here. While the mainstream narrative appears largely bullish, it seems that the smart money is pulling back and adopting a pensive approach.

It’s hard to blame anyone for being cautious. Again, the technical profile for NVDA stock isn’t very convincing. Yes, shares have gained roughly 163% since the beginning of this year. However, in the trailing month, shares have “only” gained 13.33%. And in the past five sessions from Monday, Nvidia lost 1.47% of market value.

Having said this, those who have a bearish outlook on NVDA stock will also be frustrated with the equity. In late July to early August when Nvidia seemed destined to crater, the bulls came charging in, driving shares to $130 before settling into a sideways consolidation range.

It’s a conundrum: NVDA stock is too big to fail but (for now) too big to succeed. That’s where a bull put spread might be appropriate.

Betting on a Range of Outcomes Instead of a Specific Target

Primarily, the purpose of the bull put spread is to generate income on a stock perceived to be neutral to moderately bullish. By selling a put option, a trader generates said income. Further, the market participant will also go long a put to limit losses in the event of an unexpected downturn.

Here’s how such a trade may look for NVDA stock for options expiring on Aug. 30, 2024:

• Buy the $115 put with an ask of $2.41.
• Sell the $116 put with a bid of $2.64.
• Maximum profit comes in at $23 (23 cent premium x 100 shares)
• Maximum loss is $77.
• Breakeven price is $115.77.
• Risk-reward ratio is 3.35.

Let’s walk through this trade. By selling the $116 put, a trader will initially receive a gross profit of $264 ($2.64 premium x 100 shares). However, after accounting for the purchase of the long put (hedge) at $241, the net profit received is $23 per contract. In order to keep this money, NVDA stock must stay above $116. That way, both put options expire worthless, allowing the trader to walk away with the $23 premium.

However, if NVDA stock drops to $115.77 and stays there, the market participant will lose the premium. At worst, if Nvidia tanks, the most a speculator can lose is $77. That’s because the $115 bought put helps counteract the obligation owed for the sold put. At that point, the max loss becomes the difference between the strike prices subtracted by the difference in the premium prices, multiplied by 100 shares.

By deploying a bull put spread, NVDA stock can either skyrocket or move sideways. It can even move moderately lower and the trader would still win – it just can’t drop below the breakeven price. With everything considered, that seems like a reasonable wager.

On the date of publication, Josh Enomoto 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.