Nvidia Option Trader Makes $4.8M Bet On 10% More Upside

Shares of NVIDIA Corporation NVDA were up another 3.8% on Wednesday and are now up 114% in 2020. 

Nvidia is benefiting from booming demand for high-end gaming graphics cards from bored Americans living in a shelter-in-place environment.

Even after the stock’s impressive year-to-date run, some deep-pocketed option traders are betting on more upside for the stock in coming weeks.

The Nvidia Trades: On Wednesday, Benzinga Pro subscribers received 11 option alerts related to unusually large Nvidia option trades. Here are the largest:

• At 9:59 a.m. ET, a trader sold 500 Nvidia call options with a $570 strike price expiring on Oct. 16. The contracts were sold at the bid price at $42.90 and represented a $2.14-million bearish bet.
• At 10:37 a.m. ET, a trader bought 1,187 Nvidia call options with a $590 strike price expiring on Oct. 16. The contracts were purchased at the ask price of $41 and represented a $4.86-million bullish bet.
• At 11:03 a.m. ET, a trader bought 612 Nvidia put options with a $550 strike price expiring on Oct. 16. The contracts were purchased at the ask price of $37 and represented a $2.26-million bearish bet.
• At 12:16 p.m. ET, a trader bought 784 Nvidia call options with a $530 strike price expiring Sept. 18. The contracts were purchased near the ask price at $52.838 and represented a $4.14-million bullish bet.

Of the 11 total large Nvidia option trades on Wednesday, five were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish.

Five trades represented calls sold near the bid or puts purchased at or near the ask, trades typically seen as bearish. One trade took place near the bid-ask midpoint, which is typically considered neutral. The two largest Nvidia option trades of the day were both bullish in nature.

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.

Betting On Volatility? The most noteworthy period of Nvidia option trading on the day took place between the open at 9:30 a.m. and 11 a.m. Wednesday. 

During that stretch, there were eight large option trades, all in contracts that expire on Oct. 16. If those trades all came from the same source, the net result of the series of trades was selling $570 calls, buying $590 calls and buying $550 puts.

With Nvidia trading right around $570 on Wednesday, these trades could represent a version of an option trading strategy known as a strangle.

A strangle is an option trading strategy in which a trader buys equal amounts of out-of-the-money calls and puts in a single stock with the same expiration date. The idea is the trade will only be profitable if the stock makes a large move in one direction or the other.

A strangle is a market neutral trade in that it doesn’t matter if the large move is up or down, as long as its magnitude is large enough. The downside to strangle trades is that stocks often have to make extreme moves for a strangle to end up profitable.

By buying both $590 calls and $550 puts, Wednesday’s trader may simply be betting Nvidia makes a big move in one direction or the other between now and Oct. 16. Of course, that conclusion is assuming all those large trades came from the same source.

Benzinga’s Take: The $550 puts have a break-even price of $513, implying roughly 10.5% downside. The $590 calls have a break-even price of around $631, implying roughly 10% upside.

Of course, if these trades do represent a strangle trade, the winning trade will have to do a lot more than break even to offset the losses from the losing side of the trade.

Related Links:

Clorox Option Trader Makes $3.7M Bet On 12% Downside

How To Read And Trade An Option Alert

Photo courtesy of Nvidia.