As of Monday morning trading on November 13, Nvidia (NASDAQ:NVDA) stock has rebounded from previous lows, yet the put option premiums have surged to remarkable levels. This surge anticipates the impending earnings release scheduled for November 21, covering the fiscal quarter concluded on October 30. The elevated put option premiums present an attractive opportunity to sell short for supplemental income.
At present, NVDA stock is valued at $487.89, approaching its peak since the end of August, coinciding with its last earnings report. This upward movement can be attributed to optimistic projections for the company’s performance. Analysts forecast a substantial 170% increase in revenue, reaching $16 billion compared to $5.93 billion a year ago. Additionally, non-GAAP earnings per share (EPS) are expected to skyrocket by 481% from 58 cents last year to $3.37 for the latest quarter.
Despite these positive indicators, there is a cautious outlook among contrarians who anticipate a potential “sell on the news” effect following the earnings release. This implies a swift downward shift in NVDA stock, irrespective of its warranted merit.
In anticipation of this possibility, put option premiums have surged. For instance, NVDA puts with a $485 strike price, expiring on November 24, immediately after the earnings release, trade at $21.25 per contract. This translates to an impressive yield of 4.38%.
For investors seeking a more conservative approach, shorting the $465 strike price, approximately 4.9% below the current stock price, is an option. Although the premium is lower at $12.55, the yield remains high at 2.70%.
From a practical standpoint, with an investment of $46,500 in cash and/or margin, an investor can enter a short put trade. Selling to open one put contract at $465 with a bid price of $12.55 generates an immediate income of $1,255. This represents 2.70% of the invested amount in this 11-day trade.
However, it’s crucial to acknowledge the downside risk. If NVDA stock falls to $465 or below by November 24, the investor may be obligated to purchase 100 shares at $465 each, utilizing the secured $46,500 in cash/margin. This could result in an unrealized loss. Nevertheless, the investor now owns 100 shares, which can be held until the stock rises or used to sell out-of-the-money calls for potential gains.
It’s noteworthy that historically, there tends to be a significant post-earnings downturn in the stock, followed by a subsequent rise as investors shift focus to higher growth prospects. Although the outcome of the short play is uncertain, if repeated over time, it is likely to generate consistent income.
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