Huge, Unusual Trading in Nvidia Put Options

NVIDIA Corporation (NVDA) Despite market turmoil, inventories have been flat over the past three and six months. As a result, the strike price of a large group of NVDA puts fell by 17.6%. Investors like the short put yield of 6.38% over the next seven months.

NVDA closed at $181.93 On Tuesday, March 16, the stock was trading well below its pre-earnings peak of $195.56 on February 25, but above its recent low of $171.88 on February 5. But the bar chart shows that NVDA shares have been relatively flat over the past six months.

I’ve discussed Nvidia’s potential value and ways to realize it in two recent Barchart articles. In a bar chart article on February 27, I demonstrated the value of NVDA $263 and $295, +44.5% to over 62% (“Nvidia’s huge free cash flow margin could push NVDA stock up 45%“)

And, in a follow-up bar chart article on March 1, I showed that it makes sense to sell out-of-the-money (OTM) puts with a one-month expiration period. I also discuss buying in-the-money (ITM) long call options (“Nvidia Stock May Be Oversold – What’s the Best Play for NVDA?)

So far this has been successful. For example, due April 2nd $165.00 Put option premium has moved from $5.15 only $1.25 As of March 17, there are only 16 days left.

The put contract will most likely expire worthless, allowing the investor to keep all 3.12% One month’s yield (i.e. $5.15/$165.00). It turns out that some investors are now looking to short longer-dated put options contracts.

This can be seen in the Bar Chart Unusual Stock Options Activity report. It shows over 6,100 put options contracts expiring on October 16 trading at a $150.00 strike price. The strike price is 17.6% lower than Tuesday’s closing price, with 213 days remaining until the expiration date.

The premium received by the short seller at the midpoint is $9.57which dealt a huge blow to short sellers of these put options. Yield 6.38% Over the next 7 months (i.e. $9.57/$150.00 = 0.0638).

This means that an investor who secured $15,000 through a brokerage firm could immediately receive $957 in their account by entering an order to “open a sell position” on that contract.

Additionally, the potential break-even buy point for institutional investors who may be the originators of this put trade is much lower:

$150.00 – $9.57 = $140.43 break-even point

That’s more than $40 below today’s price, which is -22.8% below $181.93, and that will only happen if NVDA falls to $150.00 or lower on or before October 16th.

In effect, it sets an attractive entry point to value and allows potential investors to earn income while they wait. Existing NVDA investors can also earn income from their stock holdings.

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

6.38% / 7 = 0.911% per month, or 91% of 1% per month
This assumes NVDA stock remains above $150.00 by October 16th. However, even if not, the lower breakeven point allows existing investors to lower their average purchase cost if the put option contract is allocated.

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

As of the date of this article, Mark R. Hake, CFA, did not hold (either directly or indirectly) any securities mentioned in this article. All information and data in this article are for reference only. This article was originally published on Barchart.com