Option Trader Bets $2.5M On Nvidia Ahead Of Earnings

Shares of NVIDIA Corporation NVDA traded flat on Wednesday, but the stock has been among the top performers in the market so far in 2020.

Nvidia investors have shrugged off the economic shutdown as the shelter-in-place environment has driven demand for high-end gaming graphics cards. Even with the stock up 108.7% year to date, one option trader made a big bet that there’s more upside in the second half of 2020.

The Nvidia Trades: On Wednesday, Benzinga Pro subscribers received seven option alerts related to unusually large Nvidia option trades. Here are the largest:

• At 10:51 a.m. ET, a trader bought 424 Nvidia call options with a $510 strike price expiring on Friday. The contracts were purchased near the ask price at $8.75 and represented a $371,000 bullish bet.
• At 11:49 a.m. ET, a trader bought 300 Nvidia call options with a $450 strike price expiring on Jan. 15, 2021. The contracts were purchased near the ask price at $83.101 and represented a $2.49 million bullish bet.
• At 12:05 p.m. ET, a trader bought 394 Nvidia call options with a $510 strike price expiring on Friday. The contracts were purchased at the ask price of $8.50 and represented a $334,900 bullish bet.
• At 12:11 p.m. ET, a trader bought 406 Nvidia call options with a $500 strike price expiring on Friday. The contracts were purchased near the ask price at $12 and represented a $487,200 bullish bet.

Of the six total large Nvidia option trades on Wednesday, five were calls purchased at or near the ask, trades typically seen as bullish. The other trade represented calls sold near the bid, a trade typically seen as bearish.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Nvidia option trade, there’s certainly a possibility it could be a hedge on a large position in Nvidia stock.

Sky-High Earnings Expectations: With Nvidia earnings due out after the market close on Wednesday, the Friday call purchases are likely nothing more than a bet on an earnings beat. However, the nearly $2.5 million trade was for calls that don’t expire for another five months, suggesting it may not be simply a play on earnings numbers and is rather a bet that the gaming boom will continue heading into the 2020 holiday shopping season.

On Tuesday, traders from CNBC's "Fast Money Halftime Report” shared their thoughts on Nvidia ahead of earnings.

Stephanie Link is concerned Nvidia’s report will live up to sky-high expectations after the big rally. Josh Brown said Nvidia’s earnings growth hasn’t kept pace with its share price growth in 2020, pushing its earnings multiple well above its historical trading range. Sarat Sethi said Nvidia should be a core holding for long-term investors, but the stock has a history of pullbacks when expectations are high heading into an earnings report.

Several Wall Street analysts raised their price targets for Nvidia in the days leading up to this week’s report:

• BMO raised its target from $425 to $565.
• Wedbush raised its target from $420 to $500.
• Wells Fargo raised its target from $430 to $510.
• Oppenheimer raised its target from $400 to $500.
• Susquehanna raised its target from $450 to $540.

Benzinga’s Take: The nearly $2.5-million call purchase has a break-even price of $533.10, suggesting at least 8.6% upside over the next five months.

Nvidia’s stock is up about 40% since its last earnings report and 17.6% just since competitor Advanced Micro Devices, Inc AMD reported its earnings in late July. Some big earnings numbers are clearly already priced into the stock at this point, suggesting near-term earnings risk may be to the downside.

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