Huge, unusual trade in Nvidia puts: Investors are bullish on NVDA

Nvidia Inc. (NVDA) The stock has remained stable over the past 3 and 6 months, despite market turmoil. As a result, an unusually large tranche of NVDA puts have traded at a 17.6% lower strike price. Investors love the short put yield of 6.38% over the next 7 months.

NVDA closed at $181.93 on Tuesday, March 16, well below its February 25 pre-earnings high of $195.56, but above a recent low of $171.88 on February 5. But the bar chart shows that NVDA stock has been relatively stable over the past 6 months.

I discussed Nvidia’s underlying value and ways to leverage it in two recent Barchart articles. In a Barchart article from February 27, I showed how NVDA could be worth between $263 and $295, +44.5% to 62% more (“Nvidia’s Huge Free Cash Flow Margins Could Drive NVDA Stock 45% Higher“.”)

And, in a follow-up Barchart article on March 1, I showed that it makes sense to sell short out-of-the-money (OTM) puts on one-month expiry periods. I also talked about buying longer-term calls in the money (ITM) (“Nvidia Stock May Be Oversold: Which is the Best NVDA Play?)

So far, that has worked. For example, the expiration of April 2. $165.00 The put option premium has fallen from $5.15 just $1.25 starting March 17, with just 16 days left.

This sales contract is likely to expire worthless, allowing the investor to retain the entire 3.12% performance for one month (i.e. $5.15/$165.00). It turns out that some investors are now looking for longer-term short-term put option contracts.

This can be seen in the Bar Chart Unusual Stock Options Activity Report. It shows that more than 6,100 put contracts expiring on October 16 have been traded at the strike price of $150.00. That strike price is 17.6% lower than Tuesday’s close with 213 days left in the period.

The premium that short sellers receive at the midpoint is $9.57giving the short sellers of these positions a huge 6.38% performance for the next 7 months (i.e. $9.57/$150.00 = 0.0638).

This means that an investor who secures $15,000 with his brokerage firm can immediately cash out $957 in his account by entering an order to “Sell to Open” this contract.

Furthermore, the institutional investors who are likely to be the initiators of this short-selling operation have a much lower potential buying breakeven point:

$150.00 – $9.57 = $140.43 breakeven point

That’s more than $40 less than the current price, i.e. -22.8% below $181.93, and would only occur if NVDA fell to $150.00 or below on or before October 16.

In fact, it establishes an attractive value entry point and allows the potential investor to earn income while they wait. Existing investors in NVDA can also earn income from their holdings.

For example, over the next 7 months, a 6.38% return collected is now equivalent to almost 1% monthly return:

6.38% / 7 = 0.911% per month, or 91% of 1% monthly
This assumes NVDA stock remains above $150.00 through October 16. However, even if this is not the case, the lower break-even point allows existing investors to reduce their average purchase cost, if the put option contract is assigned.

The bottom line is that this short out-of-the-money (OTM) bet is a great investment for potential Nvidia investors and existing shareholders as well.

On the date of publication, Mark R. Hake, CFA had no (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com