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Shares of graphics chip maker Nvidia had a great year.
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nvidia
It is the market’s favorite artificial intelligence, with its valuation surpassing $1 trillion after reporting much higher-than-expected sales and profits in the first quarter.
The company did it again on Wednesday. that it Second Quarter It beat Wall Street estimates, sending the stock higher again. Where will the price go now?
The most obvious answer to the question is somewhere, fast. The options markets have implied that Nvidia stock (symbol: NVDA) will move about 10%, up or down, after earnings.
In after-hours trading, shares rose 9.5% to $516.12, a record high. The gain came despite the stock rising 222% so far this year to Wednesday’s close.
The numbers were that good. Fiscal second-quarter sales were $13.5 billion, exceeding Nvidia’s forecast by $11 billion. For the third quarter, management expects $16 billion in sales, while Wall Street currently expects $12.6 billion.
Options traders seem prescient, which underscores the fact that options markets are a useful tool for investors. A quick way to come up with the 10% number is to look at the prices of stock options that expire near the earnings date.
Call options give the owner the right to buy Nvidia stock at a fixed price – known as the strike price – by a certain date, while put options provide the right to sell. On Wednesday morning, Nvidia’s call and put options expiring August 25 with a strike price of $457.50, close to where the stock was at the time, were trading at about $25 each.
This means that a trader could pay $50 to buy or sell Nvidia stock near where he is located. For this trade to work, the stock must move at least $50 between then and August 25th. Otherwise, the trader would have lost money. $50 is a move of about 11%.
This is the quick way to do the arithmetic. The more accurate method involves more math involving factors such as the difference in the stock price and the option’s strike price, as well as the time to earnings and the time to expiration.
The point is, investors expect volatility. This was a safe bet going into the profits. Nvidia stock is up about 50% since it reported first-quarter numbers in late May. Shares rose 24% the day after the earnings report, in which Nvidia management forecast second-quarter sales of about $11 billion, while Street predicted nearly $7 billion.
Traders who have this options trade don’t care if the stock goes up or down after earnings. Investors prefer to go up. This seems to be the trend for Thursday’s trading. However, nothing is certain. Stock markets can do strange things over short periods of time.
The other question is where the stock will go with the new big earnings “beat.” It would have likely topped the $480 price tag, according to CappThesis founder Frank Cappeleri. Nvidia stock hit a record high of $481.87 after first-quarter earnings.
He thought the bad number could send shares below $400 a share, and head toward $300.
Less than $400 comes from the gap. Nvidia stock has basically gone up to $400 from $300 in the blink of an eye. “The (upward) gap on May earnings was never challenged to the downside,” Cappeleri wrote. Stocks that jump up or down can sometimes close the gap in the subsequent trade. This did not happen to Nvidia. That shouldn’t happen after Wednesday’s results.
Cappeleri was not making a fundamental decision. He is a technical analyst who looks at charts to get a sense of what investors are thinking. “We’re not in the game of predicting earnings reactions,” he wrote, describing its levels as just “things to watch,” adding that support and resistance levels don’t really matter on days like Wednesday.
He and a few others will be watching how stocks react on Thursday.
Write to Al Root at allen.root@dowjones.com
(tags for translation) Computers/Consumer Electronics
