2 Options Strategies For Nvidia Ahead Of Earnings

After selling off with the rest of the market in March, shares of Nvidia Corporation NVDA are back near all-time highs. Investors will get their first update from the company since the coronavirus took hold in America when the company reports first quarter earnings on May 21 after the closing bell. 

NVIDIA Historical Earnings Moves

Historically, NVDA has a mixed performance leading up to earnings. If you look at the performance of the stock over the two-week, one-week, three-day, two-day, and one-day time periods before an earnings report, NVDA has roughly as many positive occurrences as negative occurrences. 

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Source: Market Chameleon

The strongest window for the stock is in the three days before a report, where it has returned an average gain of 1.2% over the last three years. 

In the first day after an earnings report, the stock is equally mixed. The stock has an equal amount of positive and negative moves on the day of earnings over its last 12 reports, with an average absolute value move of 6.8%. 

After earnings, shares of NVDA are likely to rally. The stock is almost twice as likely to rise than fall over the past 12 quarters, and is on average higher by 2.3% in the two weeks after earnings. 

Trading Idea 1: Credit Iron Condor

A credit iron condor involves buying a put option, selling a put at a higher strike, selling a call, and buying a call at a higher strike. The point is to profit from a stock’s elevated implied volatility by betting the actual volatility will not be as high. 

Source: Market Chameleon

In the trading card above, a potential credit iron condor for NVDA could involve buying a put option with a $295 strike price, selling a put with a $315 strike, selling a call with a $325 strike, and buying a call with a $345 strike. All options are set to expire on May 15. 

Based on historical price action in NVDA, this trade could result in a 24.1% gain and has a 71% of being profitable. 

Payout

The credit iron condor trade is profitable as long as NVDA is between $306.28 and $333.72 at expiration (the strike of the put being sold minus premium received, and the strike of the call being sold plus premium received). The maximum profit is $872, which will occur if the stock is between $315-$325, while the maximum loss is $1128, which will occur if the stock either below $295 or above $345.

Source: Market Chameleon

Trading Idea 2: Bull Put Spread

This idea is similar to a bull call spread. But instead of buying and selling call options, you’re buying and selling puts. The idea behind a bull put spread is to buy a put option with a low strike price and sell one with a high strike price. Because of the premium received from selling the put, the trade can be profitable even if the stock declines.

Source: Market Chameleon

In this case, you could buy a put option with a strike of $302.50 while selling a put with a strike of $307.50. Both options should expire on May 22. 

Based on past history, this trade has the potential to return nearly 17.1%, and has an 83% chance of being profitable. 

Payout

The trade is profitable as long as NVDA is above $306 at expiration (the strike of the put being sold minus the premium received). 

The maximum profit of $150 is achieved when both puts expire worthless—in this case if the stock is at $307.50 or higher at expiration. The maximum loss of $350 would happen if the stock is at $302.5 or lower at expiration. 

Source: Market Chameleon

All data is as of the May 11, 2020 close

Image source: Wikimedia Commons