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Nvidia (NVDA) rose over $10 on July 18 to $474.94 per share, up over 2.22% on the day. Investors can't get enough of the AI chip company. This has attracted unusual stock options activity with massive volume with its put options.
After the market closed yesterday, Barchart reported in its Unusual Stock Options Activity Report that volume in put options for expiration on Aug. 25, 37 days from now, surged to over 9,800 contracts. Moreover, the strike price was significantly below the present price.
The report showed that 9,870 put option contracts for the $460 strike price had traded at an average premium of $26.84. That means that one or two large traders either paid $24.156 million for 9,000 put contracts or they shorted the put contracts and received that money.
If they bought the puts the stock will have to fall below $448.10 (i.e., $474.94 spot price - $26.84 paid). That suggests they think NVDA is overvalued and it could fall over 5.6% sometime in the next 37 days up until Aug. 25.
The Short Put Side
However, if the traders shorted NVDA puts, in order to receive any of the premium they first had to secure cash and/or margin with their brokerage firm.
For example, for every 1,000 put contracts shorted, they would have to secure $46K x 1,000, or $46 million. In return, their trading account would immediately receive $2.685 million per 1000 put contracts sold short.
That works out to a very juicy yield of 5.836% for just 37 days of risk. This is because if you divide $26.85 by $460.00, or $2.65 million received per 1,000 puts for $46 million invested, the yield is 5.836%.
Since there are almost 10 periods of 37 days in a year, that works out to an annualized return of 58.36%, assuming it can be repeated 10 times a year.
Clearly, this huge amount of activity is probably a mix of both long put buyers and short sellers, collecting the put income. For example, the number of contracts traded yesterday at this strike price is over 62 times the number of contracts previously outstanding.
Either way, both sides expect the stock will make a massive move one way or the other by Aug. 25. This is likely because the company is now set to announce its Q2 earnings on Aug. 23.
Where Analysts Stand on NVDA Stock
We discussed analysts' bullishness in our last article on NVDA stock on July 4, “Nvidia Stock Still Has Upside Based On Analyst Targets - Call Options Popular With Traders.” At the time NVDA stock was at $424.13 and the average price target was $464.75, according to Yahoo! Finance.
Today, the average price target of 41 analysts is $430.00 per share. Since NVDA is at $474.94, it is now over 10% higher than even analysts' price targets.
However, one analyst says this does not matter. Daniel Morgan, Synovus Trust Senior Portfolio Manager was quoted by Yahoo! Finance as saying “Everybody else is playing catchup” in the AI wars. He says that Nvidia is the first company able to show actual numbers where AI was impacting them. That gives it first mover advantage and this is reflected in the stock price
The problem, however, is that NVDA is now in nosebleed territory, in terms of valuation. For example, according to Seeking Alpha, NVDA stock is at 60x this year's earnings and 45 times next year's earnings.
That may not be a problem for some traders who point out that Morningstar shows that its average forward P/E ratio in the past 5 years has been 41x. So, its present 45x metric is not too far off.
But to others, most likely including any long put options buyers today, that is a bridge too far. They can't justify the stock's recent surge and its nosebleed valuation.
On the other hand, short put sellers are happy to collect the 5.836% immediate yield that the $460 strike price puts offer now for the Aug. 25 expiration period.
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.
