The chip rip could be facing a make-or-break moment Thursday afternoon when Nvidia reports earnings.
Names in the space such as Qorvo, AMD, Skyworks and Qualcomm have led the semiconductor surge over the past month, posting double-digit gains alongside Nvidia, which has soared more than 12% since mid-October.
The stock is up nearly 60% on the year now, with the majority of those gains coming after the market lows of early June. If Thursday's earnings report goes the way options traders think it will, an even bigger chip rip could be in store.
"The calls out-traded the puts by about 2-to-1, and the options market is implying a move of about 6.8%. That's in line with the 6.1% or so that it has averaged over the last eight quarters," Optimize Advisors President Michael Khouw said Wednesday on "Fast Money."
As Khouw would point out, a lot of that buying was centered in the November 220-strike calls, which expire on Friday. More than 3,300 of those traded for an average price of $2.10 per contract. Buyers of these calls are betting on a 6.5% move or better heading into the weekend, a gain that would be right in the middle of the historical average move in Nvidia and the move the broader options market is implying for the stock.
But that doesn't quite tell the full story of how confident these options traders are that big gains are ahead.
"You can see also not just by what [options traders] are doing but what they aren't doing how high they think the stock might go," said Khouw. "Because if you had bought the [210-strike calls], those would be breaking even up about 4%."
As Khouw would note, despite the fact that traders buying those 210-strike calls could lock in gains for a bit cheaper, the rate of return on those contracts begins to be outpaced by that of the 220-strike calls once Nvidia makes a move of about 8.8% to the upside, or 2% higher than the stock's implied move.
"That's probably the kind of bet they're expecting to make here — low probability bet — though the options market thinks there's about a 20% chance that it gets that high," he said.
Nvidia was trading slightly higher in Thursday's session.