Earnings Volatility: Nvidia Options Are Positioned for Outsized Share Move

Stock prices may see larger-than-normal moves during earnings season, making it a potentially attractive time for options traders. For investors looking to trade against these moves, you should always keep track of how the options might shift after their earnings. Here are the top earnings and volatility for today and tomorrow:

-Earnings Date: 08/23 after market close

-Implied Move: 11.2%

-Absolute Average Actual Move for the past 4 Quarters: 11.0%

-Absolute Average Actual Move for the past 12 Quarters: 6.5%

-EPS Normalized Estimate: $1.725

-Revenue Estimate: 11.07B

According to recent data from Market Chameleon, options for Nvidia may be currently slightly overvalued, with the implied move of 11.2% higher than the average actual move for the past 4 quarters (11.0%) and the past 12 quarters (6.5%). The options market overestimated stocks earnings move 67% of the time in the last 12 quarters. The predicted move after earnings announcement was ±6.7% on average vs an average of the actual earnings moves of 6.5% (in absolute terms).

NVDA's last earnings implied volatility (IV30) going into earnings was 51.2. The last time NVDA released earnings, the implied volatility dropped to 50.0, resulting in an implied vol crush of 2%. 5 days after earnings, the 30 day IV was 42.3.

For contracts expiring this week, Nvidia call options that would make money if the stock climbed more than 9% by Friday to above $500, were the largest block of open options, with some 19,000 contracts open.

Before significant corporate events such as earnings announcements, product launches, or clinical trial results, implied volatility tends to increase. However, after the news has been released, the implied volatility can drop significantly due to the sudden clarity in the market and the stock price reaction to the news. This phenomenon is referred to as IV crush.

IV crush can lead to a decrease in option prices because the Implied volatility is lowered dramatically. This decrease in option prices due to IV crush can be a risk for options traders who have purchased options at a higher price with the expectation of making a profit from a significant move in the underlying stock price. Conversely, IV crush may not be as prevalent if the option is undervalued and the stock price moves drastically, which can pose a risk for option sellers. It's important for traders to be aware of IV crush and factor it into their trading strategy when considering options trades around significant corporate events.

Not all options are affected equally by an IV crush. IV crush affects short-term option prices more than long-term option prices.

Nonetheless, it's important to note that trading options always involve risks, and investors should consult with a financial advisor before making any trades.