Nvidia Reports This Week. Here's What the Options Market Is Telling You

Nvidia Earnings Analysis & Options Strategy – February 25th

Key Concepts:

• Implied Volatility (IV): A measure of the market’s expectation of future price fluctuations of an asset. Higher IV suggests greater expected price swings.
• Extrinsic Value: The portion of an option’s premium attributable to time until expiration and volatility. It diminishes as expiration nears.
• Diagonal Spread: An options strategy involving buying and selling options with different strike prices and different expiration dates.
• Volatility Crush: The decrease in implied volatility after an earnings announcement, typically leading to a decline in option prices.
• Delta: A measure of an option’s sensitivity to changes in the underlying asset’s price.
• Notional Value: The total value of an asset position.
• Earnings Per Share (EPS): A company’s profit allocated to each outstanding share of common stock.
• AI (Artificial Intelligence): A driving force behind Nvidia’s recent growth and a key topic expected in their earnings call.

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I. Earnings Expectations & Market Sentiment

Nvidia is scheduled to report earnings after market close on Wednesday, February 25th (around 3:00 PM Central Time). The speaker notes that while Nvidia consistently delivers impressive updates and deals (e.g., with Microsoft), the options market suggests a relatively muted expectation for a significant price move following the announcement. Last quarter’s report was described as “comical” due to the sheer volume of positive news. Currently, Nvidia is trading within a range of $180-$200, sitting at $190. The market is anticipating an 11-point implied move on a $190 stock, which is on the lower end of the typical 5-10% range seen with earnings announcements. This translates to a potential price movement of approximately $9-$19. Despite expectations of “crazy numbers” in terms of revenue and EPS, the speaker suggests the stock price may not necessarily increase, as the market may have already priced in positive results, or the future outlook (specifically for 2026) may not be sufficiently optimistic.

II. Options Market Analysis – Implied Volatility & Cycles

The analysis focuses on implied volatility across different option expiration cycles. The 4-day cycle currently has an 11-point implied move, representing 6.5% of the stock price. While this is relatively low for an earnings report, it still indicates some expected volatility. Looking further out, the March cycle shows a 20-point implied move (57% IV), April at 50% IV, May at 50% IV, and June at 51% IV. This suggests a flattening of implied volatility in the back months. The speaker anticipates that implied volatilities in the weekly cycles will eventually converge towards the 40-50% range.

III. Proposed Options Strategy: Bullish Diagonal Spread

The speaker intends to implement a bullish strategy, leaning long on Nvidia due to expectations of strong earnings and continued demand driven by AI. However, they emphasize a defined-risk approach with a contingency plan. The chosen strategy is a diagonal spread:

• Long April 190 Call: Buying a call option with a strike price of $190 expiring in April, aiming to capitalize on potential upside. The cost is $1,400.
• Short March 210 Call: Initially considered selling a 200 strike call in the 4-day cycle, but rejected due to limited upside potential (potential profit of ~$1011 for a $1200 debit). Instead, a March 210 call is sold against the April 190 call. This creates a wider diagonal spread with a net debit of $1,100.

Rationale:

• Reduced Cost Basis: Selling the March call offsets the cost of buying the April call, reducing the overall risk.
• Increased Upside Potential: The wider spread (20-point difference between strikes) allows for greater profit potential if Nvidia rallies significantly.
• Volatility Crush Mitigation: Buying the April call in a lower IV environment minimizes the impact of the expected volatility crush after earnings. The April call will experience a less severe volatility crush (estimated 10%) compared to the March call (estimated 17%).
• Flexibility: The wider spread provides flexibility to adjust the trade if Nvidia’s performance deviates from expectations. The short call can be rolled down to lower strike prices (e.g., 205 or 200) to reduce the cost basis and potentially profit from a sideways or slightly bearish movement.

IV. Trade Analysis & Potential Profit/Loss Scenarios

Using the TastyTrade platform’s analysis tools, the speaker evaluated the trade’s potential profitability under different scenarios, assuming a 10% IV crush in April and a 17% IV crush in March.

• Scenario 1: Nvidia Rallies to $200: Potential profit of approximately $300 on the $1,100 debit.
• Scenario 2: Nvidia Rallies to $210: Potential profit of approximately $600 on the $1,100 debit.
• Scenario 3: Nvidia Stays Flat or Declines: The wider spread allows for adjustments, such as rolling the short call down to a lower strike price to reduce the cost basis and potentially profit from a reversal.

V. Key Takeaways & Actionable Insights

The speaker advocates for a bullish, yet cautious, approach to Nvidia earnings. The proposed diagonal spread strategy aims to capitalize on potential upside while limiting risk and providing flexibility to adapt to different market outcomes. The analysis highlights the importance of considering implied volatility across different expiration cycles and anticipating the volatility crush that typically follows earnings announcements. The speaker will post the trade on the TastyTrade follow page and encourages viewers to consult the Nvidia earnings preview on tasty.com/news insights and participate in the Options Trading Concepts Live session at 11 a.m. Central Time on Wednesday for further discussion and trade ideas.

Notable Quote:

“If I close my eyes and I bet on earnings reports for Nvidia, I’m almost always just going to lean bullish just because again I expect them to report really good numbers.” – The speaker, emphasizing their inherent bias towards bullish expectations for Nvidia.