Options market implying 6% move when Nvidia reports earnings, says Mike Khouw

Key Concepts:

• Implied move: The expected price fluctuation of a stock after an event, derived from options prices.
• Calls and Puts: Options contracts that give the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at a specific price.
• Institutional sellers: Large financial entities like hedge funds or investment banks selling options.
• Underlying: The actual stock that an option contract is based on (in this case, Nvidia).
• Covered call: An options strategy where an investor sells call options on a stock they already own.
• Premium: The price paid by the buyer to the seller for an option contract.
• Tailwind: A factor that contributes positively to an investment's performance.
• October 3rd weeklies: Options contracts that expire in the third week of October.

Options Market Expectations for Nvidia Earnings

The options market is currently implying a move of approximately 6% in Nvidia's stock price following its earnings report. This implied move aligns closely with the company's average movement over the past eight reported quarters.

Call vs. Put Activity

Call options are outpacing put options significantly, indicating a bullish sentiment. The volume of options trading is above average.

Most Active Contracts

The most active contracts are the 185 calls expiring next week. There's a significant presence of buyers, alongside some institutional sellers.

Institutional Selling and Long Underlying Position

The speaker mentions that their firm was among the institutional sellers of the 185 calls. However, they also maintain a substantial long position in Nvidia's stock (the underlying asset).

Covered Call Strategy

The speaker suggests a covered call strategy for investors who are already long on Nvidia and are questioning how much further the stock can rise. This involves selling upside calls against their existing stock holdings to generate additional premium.

Example: October 3rd Weeklies

As an example, the speaker suggests selling the 205 calls expiring in the October 3rd weeklies. These calls are currently trading at around $2.25 (two and a quarter).

Benefits of the Covered Call Strategy

Selling the 205 calls provides a "tailwind" by generating extra income (the premium). It also allows investors to retain material upside potential, as they still benefit from stock appreciation up to the strike price of $205.

Rationale

The speaker acknowledges Nvidia's significant run-up in price but suggests that the covered call strategy is a way to capitalize on the current market conditions and generate income while still participating in potential future gains.

Conclusion

The options market anticipates a 6% move in Nvidia's stock price after earnings. The speaker suggests a covered call strategy, specifically selling the October 3rd weeklies 205 calls, as a way for existing Nvidia shareholders to generate income and manage risk, given the stock's recent performance. This strategy allows investors to capture premium while still retaining upside potential.