NVIDIA (NVDA) is set to report earnings on Wednesday August 27 after the market closed. As a large component of the Nasdaq-100 (NDX) we dug option price action around NVDA earnings for both NDX and XND (1/100th NDX). What we found may have is that traders consider an index option strategy on NVDA earnings day.
Our method of tracking earnings involves the previous twelve reports calculating the average move on an absolute value basis, comparing recent report reactions to that average, and tracking the nearest expiring at-the-money (ATM) straddle pricing the day before and day after a Stock’s reaction to earnings. The table below is a summary of that data for NVDA, NDX, and XND.
Data Sources: Bloomberg & Author Calculations
NVDA consistently reports on Wednesdays after the market close, so the options used to trade NVDA earnings expire in 2 days. Although both XND and NDX have daily expirations, we initially used the index options expiring in 2 days for a more direct comparison with NVDA option activity. As a heads up, we will get to 1-day expirations toward the end of this article.
The average move on NVDA earnings day for NDX and XND is +/-1.21% and +/-7.56% for NVDA. Last quarter NVDA was higher by over 3%, but this move was less than half the average move over the previous twelve reports. For option activity, we price the ATM straddle the day before and day after earnings. The NDX, XND and NVDA ATM straddle have overpriced the majority of the last twelve reports with the index options overpriced seven of those observations and NVDA options overpriced eight of them. Despite a slightly higher win percentage for NVDA, we are seeing increased XND activity in front of NVDA reporting this week, something that leads us to think traders are positioning for NVDA earnings with XND options.
The next graphic is a break-down of NVDA’s price reaction to earnings reports. Note most of the outlier moves have been to the upside, with last quarter’s report positive, but not greater than the average earnings move.
Data Sources: Bloomberg & Author Calculations
The next graphic shows the ATM straddle pricing on the close before earnings and on earnings reaction day. Last quarter the ATM straddle expiring that Friday dropped from 8.97 to 4.64. What is interesting is that the straddle was inexpensive versus recent history and despite the low premiums, sellers profited from NVDA’s earnings reaction.
Data Sources: Bloomberg & Author Calculations
Recall, the average price change for NDX and XND on NVDA earnings reaction days has been +/-1.21%, which is slightly higher than the average price change for NDX over all days in the same period of +/-1.04%. As expected, NVDA earnings day does have an impact on NDX price changes. This translates to higher short dated index option premiums as well.
Data Sources: Bloomberg & Author Calculations
NDX and XND straddles have overpriced seven of the last twelve price changes on NVDA earnings day. The graphics below show performance for selling both the NDX and XND 2-day ATM straddles. Note that the XND results are 1/100th of the NDX results.
Data Sources: Bloomberg & Author Calculations
The 2-day straddle performance is interesting, but there are daily NDX and XND expirations available so using the 1-day straddle for these markets was explored. The table below repeats the information for the 2-day straddle but uses the 1-day straddle results.
Data Sources: Bloomberg & Author Calculations
The net profit is slightly lower when using the 1-day straddle versus the 2-day straddle. The win percentage remains at 58.33% for this index version, but there is a strong argument behind using the 1-day index options to speculate on the market’s reaction to NVDA.
First, there is no debate around the value of the 1-day index option at the following day’s close as the options are cash settled based on the closing price of the NDX and XND. also, a major reason is the cash settlement process. In the case of NVDA and the 2-day straddles using NDX and XND, to realize the profit or loss a trade would need to be executed on the day the market is reacting to NVDA’s report. This involves market slippage and commissions. Using the 1-day options results in cash settlement, if held through the close, a much more certain process.
Despite there being an extra day until NVDA earnings, traders are already putting on positions. On Tuesday there was an XND trade that appears to be focused on NVDA reaction day. This trade sold the XND Aug 28 234 Put for 1.15 and the XND Aug 28 236 Call for 0.96 taking in 2.11 per short strangle. This trade was executed midday with XND around 234.60. That means there is a bit more room to the upside versus the downside as far as profitability goes. The payout for this trade at expiration on Thursday appears below.
NDX and XND price changes have been relatively tame on NVDA earnings day and based on the price changes this trade would make the maximum profit three of the last four observations. This would occur as the price change for XND was less than the distance to the two strike prices. Of course, this trade has more than a single day until expiration, but with low volatility on Tuesday August 26, a trade may have decided to take in a little extra time value.
