Nvidia Stock Options Surge in Price as Traders Bet on Share Correction

Nvidia's stock options become expensive as traders sell contracts to profit from a potential share price correction, but the market remains uncertain amid tech earnings reports and economic data.

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Mahnoor Jehangir
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Nvidia Stock Options Surge in Price as Traders Bet on Share Correction

Nvidia Stock Options Surge in Price as Traders Bet on Share Correction

Nvidia's stock options have become expensive as traders sell contracts to profit from a potential share price correction following the company's massive rally. The implied volatility for the artificial intelligence chipmaker's stock is hovering near its year-to-date highs, making it attractive for investors to sell short-dated call options, even if they are long the stock.

This strategy can generate additional yield as the stock appears to be experiencing some buyer exhaustion after surging around 9-fold over the past 18 months. However, selling call contracts without owning the underlying stock is considered very risky, as the price movements of AI-related stocks remain unpredictable.

Nvidia is seen as the best exposure to the artificial intelligence (AI) market, according to Morgan Stanley. However, Silicon Valley is trying to break Nvidia's CUDA software monopoly, which could impact the company's dominance in the AI space.

Nvidia's stock rebounded 4% on Monday, recovering from a 10% plunge on Friday, its worst weekly performance since September 2022. CNBC's Jim Cramer notes that Nvidia has gone from being the "star of the show to being the goat of the game."

Investors are now waiting to see if the upcoming earnings reports from other Big Tech companies like Tesla, Meta Platforms, Microsoft, and Alphabet will indicate if the tech sell-off ends or continues. The first-quarter earnings season has started, with several major companies scheduled to report their results this week.

Why this matters: Nvidia's stock options becoming expensive reflects the market's anticipation of a potential correction in the company's share price following its massive rally. The upcoming earnings reports from major tech companies will provide insights into the broader tech sector's performance and could influence the direction of the market.

The S&P 500 index closed above a key support level on Monday, which could lead to spillover buying, especially if chip stocks like Nvidia remain hot. However, the market is facing a mix of earnings news, elevated Treasury yields, and geopolitical and rate-related uncertainty, making the trading environment uncertain. Investors are closely monitoring the upcoming March Personal Consumption Expenditures (PCE) report, the Federal Reserve's preferred inflation metric, as another key event to watch.

Key Takeaways

  • Nvidia's stock options are expensive due to potential share price correction.
  • Traders are selling short-dated call options to profit from Nvidia's stock rally.
  • Nvidia is seen as the best AI exposure, but faces competition in CUDA software.
  • Upcoming earnings reports from tech giants will indicate market direction.
  • S&P 500 closed above support, but market faces uncertainty from earnings, yields, and rates.