A risky options trade to navigate Nvidia's highly anticipated earnings report

Published Tue, Feb 20 202411:47 AM ESTUpdated Tue, Feb 20 202412:05 PM EST

The biggest investment theme of the past 12 months has certainly been artificial intelligence, and the largest beneficiary of that trend has been Nvidia . It's up nearly 47% year to date and about 240% over the past 52 weeks, and it's one of a handful of companies whose valuation is measured in trillions. I would argue that, as goes Nvidia, so goes the stock market. First the good news: The AI boom isn't just a hyperbole. The $18.1 billion in revenue Nvidia reported for the quarter that ended October 2023 represented more than 200% growth from the year-earlier period. The company's products are in very high demand — such high demand in fact that many of its higher-end consumer GPUs were trading well above the list price used on eBay a couple of years ago. Fortunately, the company responded — eventually — by raising prices, and its net income margins grew with it. The consensus is that they will have doubled from ~26% in fiscal year ended Jan. 26, 2020, to an anticipated 52% when Nvidia reports this fiscal year-end on Wednesday. Here's the problem: At 30 times revenue, there's a lot of future good news baked into this cake. If you're fortunate enough to own the stock, the pace of future capital gains from here is likely to slow. As my friend and longtime CNBC colleague Carter Braxton Worth of Worth Charting might say, this chart is "steep, and uncorrected." When I asked him about the upcoming earnings recently — and as he articulated on " Fast Money " last week — he responded: "It's a coin toss." As far as the options market is concerned, it's a pretty big coin. How big? Try $200 billion. Right now, the options imply Nvidia could move ~$80 higher or lower by week's end, an 11% potential swing one way or the other — or $200 billion in market cap in round numbers. Those are the kinds of numbers used to describe Federal deficits not that long ago. So what to do? We have a position in Nvidia, but it isn't directional per se. We are short shorter-dated options and long longer-dated options, seeking to find a way to sell high options premiums. A holder of the stock could do this by selling upside-covered calls against their long equity position. One who desires to purchase the stock at lower prices might do this by selling cash-covered downside puts. It's not a trade for the fainthearted, or one I would do at the current levels, but to each their own. In our case, the trade looks something like this: You can see, this isn't a cheap trade. A single spread involves an outlay of nearly $6,000, but then this isn't a cheap stock either. With that amount of money, one could buy only eight shares, which in turn would represent roughly $99 in total revenues ($12.40 per share) if the Street consensus is right. A trade like this is starting to get into deeper water and is suitable only for more speculative and experienced traders and investors. I might suggest that if Nvidia earnings disappoint and some froth comes out of equities generally, it could cause a bit of a riptide and even those in less speculative stocks might find themselves farther from the beach than they might like. DISCLOSURES: THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.