The Reason Behind NVIDIA's Recent Gap-Up Surge: It's All About Options

Carter West joined discussion · May 30, 2024 18:02

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The recent surge in NVIDIA's stock price is strikingly similar to the explosive growth seen in meme stocks. According to options market data, the volume of bullish NVIDIA options traded yesterday reached the fourth highest in the market, doubling the average of the past 20 days. Thousands of call options, which were nearly worthless and set to expire this week, saw a colossal increase of 1000% at market open yesterday. Such a surge forced market makers to purchase more NVIDIA shares to further drive up the stock price.

The Reason Behind NVIDIA's Recent Gap-Up Surge: It's All About Options

Market makers earn from the bid-ask spread, not from changes in the stock price. After selling call options to investors, to avoid losses when the stock price rises, market makers need to buy a certain amount of the underlying stock to hedge. Thus, losses in call options can be recouped from earnings in the stock itself. However, if the stock price suddenly spikes, the stocks purchased by market makers may not be sufficient to offset losses, compelling them to buy more to hedge against potential future losses.

Following its earnings report, NVIDIA added over $500 billion in market value. Now sitting at $2.82 trillion, NVIDIA is only $100 billion shy of Apple's valuation. Given this growth rate, it's quite possible that NVIDIA will surpass Apple in the coming days. From the PEG ratio perspective, which factors in earnings growth, analysts say NVIDIA's PEG is currently only 1.1, much lower than that of Qualcomm, Broadcom, and Salesforce. NVIDIA is also expected to soon have substantial cash flow. With such significant cash reserves and the company's scale, even substantial transactions are unlikely to deplete it, leading analysts to predict that NVIDIA will follow in Apple's footsteps with major stock buybacks.

In the short term, optimism surrounding NVIDIA seems unstoppable. Recently, Elon Musk stated that his xAI intends to purchase 100,000 NVIDIA H100 chips to train and run its AI Grok. Musk just raised $6 billion for xAI over the weekend, valuing it at $24 billion, ensuring sufficient funds for orders, although NVIDIA might face supply constraints. As long as NVIDIA's supply remains tight, its stock price is likely to keep its strong momentum.

$NVIDIA (NVDA.US)$ $Apple (AAPL.US)$ $Advanced Micro Devices (AMD.US)$ $Tesla (TSLA.US)$

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