A Bullish Options Trade for Nvidia's Upcoming Earnings Report

A Bullish Options Trade for Nvidia's Upcoming Earnings Report

"Sometimes the early bird gets the worm, but sometimes the early bird gets frozen to death." -Myron Scholes

Nvidia's upcoming earnings report is over a month away, but if you're smart, you'll start preparing for it today. You want to prepare for earnings reports when trading options around them well in advance because the closer you get to the report, the harder it will be to benefit from it. Many times, anticipation for significant earnings events of leading stocks like Nvidia can result in options prices surging into the earnings report. Sometimes, they'll surge so much that you can make quite a bit of coin without even hanging around to wait for the catalyst: earnings, in this case.

Yesterday, despite a welcome CPI beat, investors rotated out of some of the market's most prominent leaders, including Nvidia. The stock lost about 5.5% yesterday. After the nasty price action, some may think it's the end of a fantastic run, but that line of thinking couldn't be more wrong in my estimation.

CNBC

This company still has the drop on Wall Street analysts, and I think it will beat its earnings expectations later in August. I think this recent sell-off presents a juicy opportunity for aggressive traders. Now would be the time to stop reading if you don't have any experience trading options. The trade I'm going to recommend is highly risky and has a decent shot of resulting in your losing your entire investment.

Nonetheless, Nvidia will likely have a great quarter. GPU demand goes almost all the way through 2025, and the Blackwell chip succeeds in typical company fashion by all early indicators. Mostly, though, Nvidia has completed its shift to a full-stack computing company, and its data center revenues are absolutely on fire.

Momentum like this isn't easily reversed. Here are some highlights from Nvidia's last earnings report. They certainly do not suggest that Wall Street analysts are in a position to downgrade the stock. Indeed, they are still behind the company, consistently underestimating its earnings potential.

Schwab

  • Nvidia's revenue tripled on a YoY basis.
  • Nvidia's data center quadrupled on a YoY basis.
  • Notably, cloud providers are becoming major customers for the company's chips and experiencing a significant return on investment, leading to a virtuous cycle in demand underestimated by many analysts.
  • The remaining Magnificent Seven stocks have been buying Nvidia's wares hand over fist.
  • The CAPEX race for Artificial Intelligence and the proof that investment is earning thoughtful users of Nvidia's crucial wares will likely only increase demand for the chips already booked up well into 2025.
  • The adjusted gross margin came in at 78.9% for the quarter.

This amazing performance last quarter does not suggest the performance next quarter will immediately revert to more normal levels. Of course, the company could finally miss and sell off big, but I doubt it. The fact is, the most successful companies on Earth are tripping over each other to buy as much of Nvidia's chips as possible. Nvidia has what is akin to a gunpowder monopoly in August 1914, so the stock price reflects the fundamentals, not irrational exuberance.

One of the most critical indicators when analyzing a stock is the ROIC-WACC. It is the Holy Grail of fundamental analysis in some ways, as it very simply explains how much value a business is creating for shareholders. It is the return on capital minus the cost of capital. Very simple. Nvidia's hasn't been going down; it's been spiking to levels that surpass all of its peers aside from Apple.

Why We Trade Earnings

Some people might think that if you're trading, earnings are exactly the time to stay away from a stock. Well, if you're interested in wealth preservation, this is true. However, I am recommending trades for younger people interested in wealth augmentation, not the fogies interested in wealth preservation. Wealth preservation is more manageable, and you can sacrifice high returns for lower-risk approaches because you are already rich.

However, earnings are precisely an opportunity because they are the bane of investors trying to avoid drawdowns—no risk, no reward. Something we may commonly forget about the stock market is that the majority of the kurtosis occurs outside of market hours. Stock returns are not normally distributed. They are skewed, and they have fat tails in their distributions. The fatness of these tails is kurtosis.

DayTrading.com

Most of this kurtosis occurs outside of market hours because this is when the most important piece of fundamental information about a stock is released; its earnings. Nvidia has perfected the tempo of beating Wall Street analysts time and time again and pressing its considerable competitive advantage to exceed expectations. They will likely repeat this pattern this quarter, and the stock will rally. Of course, I could be wrong about both, in which case this trade will fail.

Seeking Alpha

I am also convinced that price action can go higher than most people think because a virtuous cycle has started. Nvidia's gains have been so substantial that managers whose performance is tied to the index now have to chase Nvidia to keep up with the benchmark against which their performance is measured. I think this cycle has only just started and that Nvidia has a lot of room to run. Nvidia has put up almost ten times the index return over the last year and more than twice its nearest mega-cap competitor.

Finom Group,

Nvidia has been driving the bull market, and was one of the primary catalysts for it beginning. Luckily, the timetables for the current bull market suggest that it would be historically very short if it were to end today. Odds are, there's some time on the clock for this bull market and for Nvidia to exploit its once-in-a-generation commercial advantage.

Risks and Where I Could Be Wrong

Nvidia is the most popular stock in the market and has been subject to a massive runup that naturally creates valuation risk. If there are any missing estimates, there is a likelihood of a large sell-off, which will likely result in you losing all or nearly all of what you invest in the options trade below. The valuation risk in Nvidia is considerable, and expectations are high.

ValueInvesting.Io

But, the opportunity is great for this reason as well. There are several advantages to the trade. Since Nvidia has such highly developed options markets, it benefits from a significant implied volatility flush going into earnings. This means that you may taste some pretty good trading gains if you buy the options going into the earnings and sell them before the event even occurs. This is one way to mitigate risk.

Of course, macro risks could also derail Nvidia's price ascent. Being a market leader with valuation risk will make Nvidia more susceptible to a market downswing. High beta is a double-edged sword.

  • Unanticipated re-emergence of inflationary pressure that makes cuts less likely or postponed.
  • Re-emergence of inflationary pressure or economic impact from geopolitical risks.
  • Commercial Real Estate, Banking, or Credit Event that leads to recession
  • Fed policy error or domestic political risk in the United States leading to recession or risk-off environment.

Overall, the likelihood of all of these risks is low at this time. I find the most likely course that Nvidia will beat earnings and rally, which is why I am suggesting this aggressive trade. It is not for everyone, and it is a very risky trade, but I do have confidence that you will have ample opportunity to sell these options at a higher price if you buy them today. The gains could be significant if you hold onto them past a successful earnings report.

Conclusion: The Trade

I am going to suggest two different options contracts: the September 20, $140 and September $150 $NVDA call options. You can buy one or both. The first option will be lower risk since it is closer to the current price of the underlying, but the second one will pay off higher if the stock breaks out, which is a distinct possibility. The $140 last traded at $8.31 and the $150 last traded at $5.66. Those who are more risk-averse should buy the $140 only.

ThinkOrSwim

As you can see, the odds are quite good for post-earnings price activity given where Nvidia currently is after a large sell-off, and given the proximity to earnings. To give us some idea of recent history, I will extrapolate some averages from the last eight earnings reports to suggest how likely we will experience gains on our suggested options contracts.

Source: Consilient Observer, Stock Market Concentration

The average gain one day after an earnings report for Nvidia is 8.69%, but that goes up to 12.23% if you only count the positive times. I think only counting the positive may be okay this quarter, given that we are likely about to enter a Fed-cutting cycle with employment levels near the best they've been in fifty years.

The stock averages 14.97% five days after earnings in positive instances, which have occurred in six of the last eight quarters. It averages about half that when negative instances are included. If we get a similar gain post earnings and stay somewhat close to here or higher in price as we approach earnings, these options will pay off handsomely.

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