There is a saying that is often said in the option pit. “Sell your little car and buy a Lamborghini.”
Of course, it refers to the act of selling dollars at a low price among the money options and collecting the premium bet with a high probability. As those little things grow, you can earn small fortunes over time. Of course, the flip side is that the investor bought a worthless option.
Nvidia Monday’s price action illustrates that concept well.
Nvidia options traders are gearing up for another tough trade as the stock price fell more than 6.5% from Thursday’s high on Monday, making some of its most popular short-term contracts worthless again.
Nvdia, 5 days
More than 15% of NVIDIA options traded through midday Monday were contracts that expired at the end of the trade, according to data compiled by SpotGamma. Among the most popular contracts were the 225-strike call and the 222.5-strike call, each traded more than 220,000 times and scheduled to expire worthless after Friday’s settlement. This is a repeat of Friday’s session, when 235 strike calls saw $114 million in premium slip from funds.
Despite the weakness, the bulls don’t seem discouraged. Nvidia options were the fifth most traded on the market on Monday, behind only the benchmark index and Tesla, with more than 3 million contracts traded and total premium worth more than $1.3 billion. $1 billion of that was related to phone calls.
Data from ThinkOrSwim showed call volume on Monday was more than double that of puts, but there were many exchanges of calls below bids, meaning they were likely sold.
Still, the stock’s four largest options trades were all bullish call buyers of expensive in-the-money contracts expiring on Friday, totaling at least $10 million.
According to data from Cboe LiveVol, traders are expecting a 6.25% change based on the implied volatility of earnings, which is on par with normal expectations but higher than the average realized value of 3.2%. Big moves that exceed expectations can save options traders a lot of money.
Companies with telephone contracts may need a change of pace. NVIDIA has fallen following the last three reports, including a 5.5% drop in February.
