Nvidia Corp. NVDA shares have been on a tear since the start of 2023, fueled by the explosion of interest in artificial intelligence (AI) sparked by OpenAI‘s ChatGPT. However, a new report suggests some of this growth might be fueled by reckless speculation.
Risky Bets On A Rising Star?
A Bloomberg report warns that Nvidia’s stock is becoming a playground for “YOLO” traders – those who embrace high-risk, high-reward bets.
The report points to a surge in options activity on Monday, with traders snapping up over 24,000 call contracts expiring this Friday (March 22) with a strike price of a staggering $1,940 (nearly double the current price). The small purchase sizes (around 900 contracts each) suggest this is likely retail investor activity, reminiscent of the meme-stock frenzy of 2021.
A call option gives the buyer the right, but not the obligation, to purchase a stock at a certain price (strike price) by a certain date (expiration date). If the stock price rises above the strike price by the expiration date, the option becomes profitable.
While Nvidia, unlike meme stocks, is a well-established industry leader, this buying spree raises concerns about a potential bubble.
“Nvidia has been an investor favorite to play the AI trend. We are now also seeing what looks to be retail making some interesting plays while the Nividia AI developer conference goes on this week,” said Michael Beth of WallachBeth Capital LLC, according to Bloomberg.
This comes amidst Nvidia’s GTC 2024 conference, a major AI industry event.
See Also: Best Artificial Intelligence Stocks
Hedging Bets Or Chasing Dreams?
The report also acknowledges alternative explanations for the options activity. Chris Murphy of Susquehanna International Group suggests it could be a hedging strategy by professional traders. This complex strategy might involve holding short-call options with lower strike prices and offsetting them with these long-shot options.
Regardless of the motivations, the data shows a significant number of call contracts were purchased on Monday, making it the third-most traded contract for Nvidia stock.
Investor Caution Despite AI Optimism
Interestingly, Nvidia’s GTC 2024 opening keynote by CEO Jensen Huang didn’t ignite the overwhelmingly positive response some investors might have anticipated. The stock price actually dipped over 1.5% in after-hours trading despite a modest gain during the regular session. Some analysts downplayed this as a classic “sell the news” reaction, expressing continued confidence in Nvidia’s long-term prospects in AI and its ability to deliver strong earnings growth.
In premarket on Tuesday, Nvidia was down 1.45% at $884.55, according to Benzinga Pro data.
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