Tech bellwether Nvidia NVDA is due to report earnings on Feb. 26 after the close of trading. The price of options can give you an idea of just how much a stock will move after earnings are reported. Specifically, the price of the at-the-money straddle (call price + put price) is the market’s estimate of the size of the move that is going to take place after the earnings announcement.
As has been the case for several quarters now, Nvidia options are somewhat expensive heading into the earnings. In the fourth quarter of 2024, for example Nvidia’s at-the-money 146 straddle was selling for 14 before earnings. On the day after the earnings, Nvidia traded eight points higher at its zenith, traded about four points lower at its nadir, and closed one point higher. Paying 14 for the straddle was not a winning trade.
The following table shows how far Nvidia has moved on the day after its most recent 10 earnings announcements.
|
Earnings Date |
Day 1 move after earnings |
|
Wed 11/20/2024 AC |
0.53% |
|
Wed 08/28/2024 AC |
-6.38% |
|
Wed 05/22/2024 AC |
9.31% |
|
Wed 02/21/2024 AC |
16.40% |
|
Tue 11/21/2023 AC |
-2.45% |
|
Wed 08/23/2023 AC |
0.09% |
|
Wed 05/24/2023 AC |
24.36% |
|
Wed 02/22/2023 AC |
14.02% |
|
Wed 11/16/2022 AC |
-1.46% |
|
Wed 08/24/2022 AC |
4.01% |
Except for the 16.4% move a year ago, the Nvidia pre-earnings straddle has been overpriced (that is, priced higher than the ensuing move) in five of the past six quarters. Perhaps it’s worth noting that two of the best numbers in that table came in the past two Februarys.
In trading on Thursday, the Nvidia (Feb. 28) 140 straddle (which is the at-the-money straddle) was priced at 9.12% of the stock price. That is a bit lower than recent quarters but is still relatively high. If you consider all 10 of the one-day moves shown in the above table, 9.12% is less than four of them, but is also substantially larger than the rest. So, buying this straddle does seem to have a significant historical value.
Rarely, the options market can help predict the direction of the move if there is an excess of call or put buying heading into the earnings announcement. For Nvidia, on average, about 61% of the options traded in a given day are calls and 39% are puts. That average has been the norm for quite some time. The following table shows the percentage of puts vs. calls over the past 10 days.
|
Date |
Call Vol. |
Put Vol. |
Call% |
Put% |
|
2/5/2025 |
1,515,474 |
922,911 |
62% |
38% |
|
2/6/2025 |
1,453,958 |
1,108,420 |
57% |
43% |
|
2/7/2025 |
2,634,854 |
1,552,516 |
63% |
37% |
|
2/10/2025 |
1,655,852 |
968,869 |
63% |
37% |
|
2/11/2025 |
870,199 |
757,484 |
53% |
47% |
|
2/12/2025 |
1,032,002 |
597,719 |
63% |
37% |
|
2/13/2025 |
1,469,824 |
845,166 |
63% |
37% |
|
2/14/2025 |
2,025,520 |
1,167,253 |
63% |
37% |
|
2/18/2025 |
1,274,516 |
805,633 |
61% |
39% |
|
2/19/2025 |
1,006,103 |
638,687 |
61% |
39% |
There doesn’t seem to be any particular increase in the distribution of puts versus calls traded, so once again the options market is not telling us anything about the ensuing post-earnings direction that the stock price will take.
Once last clue that options can sometimes give is to expect a large move in the implied volatility of the options increases. The following table shows the composite implied volatility (CIV) of Nvidia options over the past 10 days.
|
Date |
CIV |
|
2/5/2025 |
56.2 |
|
2/6/2025 |
52.3 |
|
2/7/2025 |
54.6 |
|
2/10/2025 |
55.3 |
|
2/11/2025 |
54.8 |
|
2/12/2025 |
55.4 |
|
2/13/2025 |
54.1 |
|
2/14/2025 |
60.3 |
|
2/18/2025 |
64.1 |
|
2/19/2025 |
64.4 |
That is a small increase, from 56.2 to 64.4. If a large post-earnings move were expected, that increase in CIV would generally be far greater.
Also, it is sometimes beneficial to see how that CIV is distributed. That is, how much more expensive are the near-term options than then longer-term ones? The following table shows the implied volatility of the at-the-money straddle, as of the close of trading on Feb. 19.
|
Expiration Date |
Implied Volatility |
|
Feb. 28 |
73.4 |
|
March 7 |
63.3 |
|
March 14 |
58.3 |
|
March 21 |
58.4 |
|
March 28 |
56.3 |
|
April 4 |
54.7 |
|
April 17 |
52.7 |
|
May 16 |
50.5 |
It is typical prior to earnings, that the near-term options are more expensive than the longer-term ones. Last quarter, the nearest-term options were trading with an 82% implied volatility, so this quarter that has been tempered a bit. That merely confirms what we already saw — that the near-term straddle is a bit cheaper this quarter than it was last quarter.
Overall, this Nvidia straddle is not a buy. I would say that the conclusions from last quarter are still pretty much correct: Options traders are vastly overestimating the impact of Nvidia earnings. That is in part due to the fact that Wall Street analysts are doing a better job of estimating those earnings than they used to, but options traders don’t seem to believe them. Those who made good money speculating on Nvidia earnings the past two Februarys may be willing to trying again, but two months is a very small data set on which to base a trade.
However, just because Nvidia straddles are not favorably priced prior to the earnings doesn’t mean that there aren’t other straddles which one might consider buying.
Next week, Workday WDAY and Dell Technologies DELL straddles appear to be favorably priced to purchase just prior to the earnings. Workday is slated to report earnings after the close on Feb. 25, while Dell is scheduled for after the close on Feb. 27. Wait until the late in the day that earnings are to be reported, and then buy the at-the-money straddle if it satisfies the criteria below:
The next morning, the stocks will open probably on a gap. Use these guidelines for exiting the trades:
1. Let the stock gap and trade for an hour. If it has not exceeded the previous day’s trading range by that time, then sell the straddle and take the loss.
2. Otherwise, continue to hold the straddle as the trading day progresses. If the stock trades back into its opening gap at any time during the day, then sell the straddle.
3. If neither of these conditions occur, then sell the straddle just before the close of trading.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of “Options as a Strategic Investment.”
©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.