Nvidia Breakout Remains Elusive as Dispersion Unwind Looms
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“NVIDIA’s $200 Strike Is the Epicenter of Options Risk: The $200 call strike carries 109,000 open interest — the highest on the chain — and faces an estimated 82% loss from implied volatility crush alone, even if the stock holds steady.”
The VIX 1-day rose today as expected, but was much lower than I would have thought and lower than previous Nvidia results. This suggests the post-earnings vol crush in the market on Thursday may be smaller, since there won’t be as much vol to crush.
The VIX 1-day fell hard at the open, dropping to around 9, which really helped to fuel much of the morning rally, with the index adding only about 10 points to the gain seen in the first 20 minutes of trading. So yeah, vol will fall at the opening tomorrow, but I don’t think it will produce a major move higher — maybe something in the 50 bps range, if that.
NVIDIA reported results and did its usual song and dance around its numbers. No surprise really in the after-hours, with the stock pegged around the $200 level, which I identified last week as the key level. If the stock can’t get through $200 — through the $200 to $205 range — I would expect it to sell off. The $200 calls were trading at $4.05 by day’s end, and even with the stock trading at $200 after hours, they are losing nearly all of their premium. The $195s were trading at almost $6.40, and even those calls aren’t paying off. The only calls barely paying off are the $190s, which were trading around $9.40. So I would think if the post-market action holds, or the market doesn’t get anything to latch on to in the post-earnings call, we see the shares trade lower tomorrow.
(Optioncharts.io)
I wish there were more to talk about, but the market has been a bore. I don’t expect that to be the case for much longer, though. Now that we have passed earnings from the most important company in the universe, I expect the dispersion unwind to pick up and stock-level implied volatility to mean-revert back to index-level volatility, which should lead to lower dispersion and higher correlations, and the spread between dispersion and correlation to contract. Regular readers of this FREE commentary should know what that implies.
As a reminder, tomorrow is a settlement date, with $22 billion due, $37 billion on Friday, about $59 billion on Monday, and another $19 billion on Tuesday. So that is $137 billion in Treasury settlements over the next four trading days. Let’s not forget there will be another settlement on Thursday, March 5, but we can worry about how much that will be tomorrow.
Good Luck!
-Mike
Glossary by ChatGPT
Basis Points (bps) – A unit equal to one hundredth of a percentage point, commonly used to measure changes in interest rates or returns.
Correlation – A statistical measure of how closely two securities or indices move in relation to one another.
Dispersion – The difference between individual stock volatility and overall index volatility, often used in options strategies.
Implied Volatility – The market’s forecast of a security’s future volatility derived from option prices.
Settlement Date – The date on which a securities transaction is finalized and cash and securities are exchanged.
Volatility Crush – A sharp decline in implied volatility, typically following a major event such as earnings.
Disclosure
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You nailed it!!