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Struggling NVIDIA Lures Front-Month Call Sellers

Traders sold December calls on NVDA

by 12/13/2012 10:09 AM
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Call volume ramped up on NVIDIA Corporation (NASDAQ:NVDA - 12.57) yesterday, with approximately 13,000 contracts changing hands on the tech stock. This flurry of activity represented 1.51 times the stock's average daily volume. By comparison, only 3,052 puts were traded, which amounts to less than half the norm for NVDA.

However, the mood among call players wasn't necessarily bullish. A healthy chunk of the volume was concentrated at the equity's December 13 call, where 6,133 contracts crossed the tape. About 70% of these calls changed hands at the bid price, indicating they were sold, and open interest rose overnight by 3,253 contracts -- pointing to the initiation of new positions. What's more, data from the International Securities Exchange (ISE) confirms that quite a few of these calls were sold to open.

By selling NVDA's December 13 call, traders are essentially wagering on the stock to remain stuck at or below $13 through the close next Friday, Dec. 21 -- when front-month options are slated to expire. If this scenario plays out as expected, the calls can be left to expire worthless, and sellers may retain the entire premium collected as their maximum potential profit.

For yesterday's December 13 call sellers, the contracts traded at a volume-weighted average price (VWAP) of $0.10. In other words, successful premium sellers will walk away with a profit of $10 per contract (0.10 premium x 100 shares per contract) if NVDA remains pinned beneath the focus strike through the next six trading days.

While call writers may simply be neutral-to-bearish speculators, this tactic is also frequently used by shareholders in the underlying stock. By selling covered calls against their shares, traders can generate modest profits from an otherwise-underperforming equity.

After checking out the charts, it's worth noting that the $13 area capped NVDA's rally attempts in October and November, after previously serving as support throughout the month of September. Additionally, the stock's 20-week moving average is lingering at $13.02, and could keep a lid on NVDA's progress during the short term.

 Weekly Chart of NVDA since August 2012 With 20-Week Moving Average


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