Nvidia Earnings Are May 20th. Here Are Two Trades Depending on Whether You Own the Stock or Not.

Key Concepts

• Collar (Costless Collar): An options strategy used to hedge a long stock position by selling an out-of-the-money (OTM) call and using the proceeds to buy an OTM put.
• Call Diagonal Spread: A strategy involving the purchase of a longer-dated call option and the sale of a shorter-dated, higher-strike call option.
• Call Skew: A market condition where implied volatility is higher for out-of-the-money call options compared to puts, often indicating bullish sentiment or high demand for upside exposure.
• Binary Event: A specific market catalyst (in this case, earnings) that causes a significant spike in implied volatility for options expiring near that date.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset.
• Gamma: The rate of change of an option's delta; positive gamma benefits the holder if the stock moves in the direction of the position.

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1. Market Context: Nvidia (NVDA)

Nvidia has experienced extreme volatility, growing from a $1 trillion market cap in May 2023 to a $5 trillion valuation. The stock has traded in a wide range, from lows near $104 to highs of $217. With earnings scheduled for May 20th, the May 22nd expiration reflects significantly higher implied volatility (approx. 45%) compared to other expirations, as it captures the "binary event" of the earnings report.

2. Strategy for Existing Long Shareholders: The Costless Collar

For investors holding long shares who wish to maintain long-term capital gains status while hedging against downside risk, the speaker recommends a Costless Collar.

• Methodology: Sell an OTM call (e.g., 230 strike, ~20 delta) to finance the purchase of an OTM put (e.g., 190 strike).
• Outcome: This creates a "net credit" or "scratch" trade that caps upside potential but provides a floor for the position.
• Key Advantage: Due to Nvidia’s significant call skew, the upside potential (distance to the call strike) is greater than the downside risk (distance to the put strike), allowing the investor to participate in upside moves while being protected below $190.
• Technical Result: This effectively transforms the long stock position into a long call spread for the duration of the earnings event.

3. Strategy for New Positions: Call Diagonal Spread

For traders looking to initiate a long position with defined risk, the speaker suggests a Call Diagonal Spread.

• Step-by-Step Process:
  1. Long Leg: Buy a call option with 40–50 days to expiration (e.g., 220 strike, 40 delta).
  2. Short Leg: Sell a call option with 20–30 days to expiration (e.g., 235 strike, 20 delta) to capture the earnings volatility.
• Risk/Reward: The trade requires a debit of approximately $670. The maximum value of the spread is $1,500, offering a potential return on capital of nearly 100% if the stock reaches the short strike.
• Flexibility: This strategy benefits from positive gamma if the stock moves higher and remains robust if volatility expands or contracts, depending on the direction of the stock move.

4. Notable Statements

• On the nature of the stock: "It's just been an absolute face ripper."
• On the collar strategy: "It won't use additional buying power if you have these shares because the call on the upside is covered and it'll protect you to any movement down below 190."
• On the diagonal spread: "It's a really interesting trade to put on into earnings into a high volatility earnings like Nvidia."

5. Synthesis and Conclusion

Nvidia’s upcoming earnings present a high-volatility environment that requires strategic risk management. For those already long, the Costless Collar provides a hedge that leverages call skew to maintain upside participation. For those seeking to enter, the Call Diagonal Spread offers a defined-risk, high-reward profile that capitalizes on the volatility premium inherent in the earnings cycle. Both strategies emphasize the importance of using options to align with specific market outlooks while strictly limiting downside exposure.