nvidia-(nvda)-option-traders-bearish-before-earnings

NVIDIA (NVDA) Option Traders Bearish Before Earnings

Investors of NVIDIA Corporation (NVDA) have kept the share prices range bound ahead of the company’s fiscal second quarter earnings announcement. At first glance, it appears option traders are positioned for a negative move, as there are a larger number of put options in the open interest than calls. The unusual option activity could create a strong upward trend in the price action if NVDA delivers a positive earnings surprise.

A sizable number of put options remain in the open interest for NVDA, and option premiums are at an unusually elevated level right now. Trading volumes indicate that traders have been buying puts and selling calls in anticipation of an unfavorable earnings report. Unwinding these bets could create unexpected upward pressure on the share price of NVDA.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison between the stock’s price action and option activity shows that, if NVDA delivers a positive report, the company’s share price could rise, moving further above its 20-day moving average after the announcement. This is possible because options are priced for a move downwards, but unexpected good news could catch traders by surprise and create a swift rise in share price.

Key Takeaways

  • Traders and investors have kept the NVIDIA share price range bound ahead of the earnings announcement.
  • The share price has recently closed above its 20-day moving average.
  • Call and put pricing is predicting a stronger move to the downside.
  • The volatility-based support and resistance levels allow for a stronger move downwards.
  • This setup creates an opportunity for traders to profit from an unexpected earnings result.

A comparison between the details of both option behavior and stock price can grant chart watchers valuable insight; however, it is imperative to understand the context in which this price action took place. The chart below depicts the price action for the NVDA share price as of Monday, Aug. 16. This created the setup leading into the earnings report.

Current Trends

Over the past month, the trend for NVDA stock has the share price falling from the top of the volatility range to below the 20-day moving average in mid-July, before rising back above the 20-day moving average in early August and remaining above this level. In this time period, the lowest NVDA share price was $178 in mid-July, whereas the highest share price was $207 in early August. It should be mentioned that the historical prices may seem skewed, as NVDA went through a 4-for-1 split on July 19. The share price closed in the middle region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has remained above the 20-day moving average in the week before earnings. This price move from NVDA shares implies that investors’ confidence remains stable as the earnings report approaches.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for NVDA has recently closed above its 20-day moving average, chart watchers can recognize that traders and investors are expressing confidence going into earnings. It’s notable that, in the week before earnings, NVDA’s share price has fallen a bit but still remains above the 20-day moving average. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for favorable earnings or not. 

Option trading details can provide chart watchers with additional context to help them form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a noticeable margin. On Monday, there were over 211,000 calls traded as opposed to over 124,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming announcement.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that NVDA shares are in an average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Aug. 20, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 36% probability that NVDA shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 36% chance if prices go lower on the announcement.

It’s necessary to note that the open interest featured nearly 1.4 million calls compared to over 1.5 million puts, demonstrating the narrow bias that option buyers had. That traders have just barely favored calls over puts. While recent call volumes have outweighed put volumes, it should be noted that implied volatility for call options is falling, which means that these options are being sold rather than bought. This implies an overall bearish sentiment.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either way, but with slightly more room to the downside. This suggests that option buyers don’t have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, NVIDIA shares fell by 1.35% the day after earnings before rising the following week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

While perhaps not fitting the exact definition of a bellwether stock, NVDA is a member of the S&P 500 and a leader in the semiconductor industry, so its earnings results may move indexes directly. No matter what the report says, it could have an impact on stocks in the semiconductor sector. A positive report could lift other stocks in the sector such as Intel Corporation (INTC) or Taiwan Semiconductor Manufacturing Company Limited (TSM). It could also affect exchange traded funds (ETFs) such as Invesco’s QQQ Trust ETF (QQQ), State Street’s S&P 500 ETF Trust (SPY), or ProShares’ Ultra Semiconductors ETF (USD).