Market Movers - February 26th: Coreweave & Nvidia Trade Breakdown
Key Concepts:
- Implied Volatility (IV): A measure of the market's expectation of future price fluctuations. Higher IV suggests greater uncertainty and potentially larger price swings.
- Delta: Represents the rate of change in an option's price for a $1 change in the underlying asset's price. A 20 delta put has an 80% probability of expiring out-of-the-money.
- Strike Price: The price at which the underlying asset can be bought (call option) or sold (put option) when the option is exercised.
- Break-Even Point: The price of the underlying asset at which the option trade becomes profitable.
- Strangle: An options strategy involving simultaneously buying an out-of-the-money call and an out-of-the-money put with the same expiration date.
- Premium Selling: The act of selling options, collecting the premium as profit, with the obligation to fulfill the contract if exercised.
- Earnings Trade: A strategy employed around company earnings announcements, capitalizing on expected price movements or volatility.
Coreweave (CORW) - Pre-Earnings Trade
Liz Deerking and Jenny Andrews discussed a pre-earnings trade on Coreweave (CORW), anticipating a relatively contained price movement following the earnings release.
Details:
- Current Price: $96
- Expected Move: $12
- Implied Volatility Rank: 52 (indicating heightened volatility)
- Strategy: Selling an out-of-the-money put option. Specifically, the $84 put expiring tomorrow (Friday).
- Premium Received: $220
- Risk: Coreweave dropping below $84. Break-even point is around $82. A $1 move below $82 results in a $100 loss (equivalent to owning 100 shares at $82).
- Probability of Success: 80% chance the put will expire out-of-the-money.
- Trade Characterization: Neutral to bullish, offering “instant gratification” with expiration tomorrow.
- Recourse: If the trade moves against them, they could take 100 shares of Coreweave at the strike price ($84), convert it into a covered call, close the put for a loss, or roll the put out in time.
Framework: The trade leverages the expectation that Coreweave’s price will remain above $84 by Friday’s expiration, allowing them to keep the $220 premium. The selection of the $84 put was based on it aligning with the expected move for the cycle, with a $2 buffer.
Nvidia (NVDA) - Post-Earnings Trade
Despite positive earnings, Nvidia experienced a 5% decline in its stock price. The traders decided to implement a longer-term, neutral strategy to capitalize on this situation.
Details:
- Initial Reaction to Earnings: Minimal movement after hours, despite positive results. Opened down $10 today.
- Expected Move (prior to today): $10
- Strategy: Implementing a strangle – selling both a call and a put option.
- Options Selected: April expiration options. Sold a $220 call and a $150 put.
- Premium Received: $421
- Risk: Getting long 100 shares of Nvidia at a break-even of approximately $149 (on the put side) or short 100 shares at $224 (on the call side).
- Probability of Success: Approximately 75%.
- Trade Characterization: Neutral trade, profiting if Nvidia remains between $150 and $220 over the next 50 days.
- Standard Deviation: The strike prices were chosen based on being one standard deviation away from the current price.
Framework: This trade aims to profit from time decay and a lack of significant price movement in Nvidia over the next 50 days. The strangle strategy benefits from Nvidia remaining within a defined range. The traders emphasized this is a “slow-moving tanker” trade compared to the Coreweave trade.
Comparative Analysis & Overall Perspective
The traders presented two distinct trading strategies: a short-term, high-probability trade on Coreweave and a longer-term, neutral trade on Nvidia. Both strategies involved selling premium, capitalizing on implied volatility.
Key Argument: Both trades demonstrate a strategy of exploiting market inefficiencies and volatility around earnings announcements. They highlight the importance of understanding risk-reward profiles and selecting appropriate strategies based on time horizon and market expectations.
Notable Quote: “This is a tale of two cities here. Right. So, one we have a neutral trade, one we have a neutral to bullish trade. The Coreweave is instant gratification. We will find out tomorrow. Nvidia is going to be a slow-moving tanker. We have 50 days to see how this trade plays out.” – Liz Deerking.
Data/Statistics:
- Nvidia down 5% despite positive earnings.
- Coreweave expected move of $12 with a 52 implied volatility rank.
- Coreweave $84 put option with 80% probability of expiring out-of-the-money.
- Nvidia strangle with a 75% probability of success.
Conclusion:
The Market Movers segment showcased two distinct options trading strategies designed to profit from earnings-related volatility. The Coreweave trade offered a quick, high-probability gain, while the Nvidia trade provided a longer-term, neutral approach. Both trades emphasized the importance of risk management, understanding option greeks (like delta), and selecting strategies aligned with individual risk tolerance and market outlook. The core takeaway is the potential to generate income by strategically selling options, even in volatile market conditions.
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