Nvidia (NASDAQ:NVDA) stock continues its relentless climb, defying a massive 62% surge in the last three months. As of early trading on August 1, NVDA stock stands at $467.54, significantly higher than its value of $289.10 on May 1. This remarkable ascent has caught the attention of short sellers, who find the put options particularly alluring due to the elevated put premiums.
On July 19, there was unusual trading activity in NVDA puts at the $460 strike price with an expiration date of August 25. At that time,Nvidia stock was trading at $474.94.
Despite a marginal decline of $7.36 since then, representing a mere 1.55% dip, the put premiums have not fluctuated significantly. For instance, on July 19, the $460 strike price put option was valued at $26.85, while today, the same put option commands a price of $27.83.
Consequently, institutional investors who were shorting the put options in mid-July have not faced substantial losses. Unless NVDA experiences a further decline of $34.39 or 7.36% by August 25, these put sellers are set to profit handsomely.
The short put traders collected $26.85 by selling the $460 strike price puts, yielding an impressive 5.836%. Therefore, their breakeven price was $433.15, representing a 7.36% decline from the current spot price.
Furthermore, traders have the opportunity to short new near-term out-of-the-money (OTM) puts with remarkably high premiums and effective yields.
Shorting OTM Puts Ahead of Earnings
Nvidia is scheduled to release its fiscal second-quarter earnings for the period ending July 31 on August 23. Post-earnings, put premiums will reflect investor sentiment on whether the stock will rise or fall in response to the announcement.
Investors anticipating a “sell on the news” reaction may find that lower strike prices have higher put premiums. Short sellers can capitalize on this fear by shorting these highly-priced put options.
For instance, the September 1 expiration period, one month from now, reveals that the $450 strike price puts are trading at $23.73, offering an attractive yield of 5.27% for just one month until expiration.
This strike price is only 3% below the current price, making it an appealing option for more conservative investors. For example, the $425 strike price for September 1 puts is valued at $14.33, offering a still considerable yield of 3.37% (i.e., $14.33/$425.00).
To illustrate, an investor with $42,500 in cash and/or margin can “Sell to Open” one put contract at the $425.00 strike price for expiration on September 1. The account will receive an immediate credit of $1,433 (i.e., $14.33 x 100 shares in one put contract), resulting in a yield of 3.37% (i.e., $1,433/$42,500 invested).
Moreover, the conservative investor enjoys a low breakeven price. Nvidia stock would need to decline to $410.67 (i.e., $425.00 strike price – $14.33 premium received), which translates to a drop of approximately 12% below the current price before any unrealized loss is incurred.
Even in that scenario, the investor would still own 100 shares of NVDA at an effectively discounted buy-in price. They could subsequently sell short OTM covered call options in future expiration periods to offset any potential unrealized losses.
This highlights the current attractiveness of NVDA put premiums, providing short sellers with a range of conservative risk profiles while offering high yields and solid downside protection.
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