Nvidia Stock Faces Sharp Decline as AI Rival Emerges

Shares of artificial intelligence (AI) darling Nvidia Corp (NASDAQ:NVDA) are experiencing an 11.8% drop in pre-market trading, putting the chip stock on track for its worst performance since March 2020.

The sell-off was triggered by Chinese startup DeepSeek's release of a free, open-source large-language model in late December. The company revealed that the model was developed in just two months at a cost of under $6 million, causing investors to question the demand for Nvidia's chips and its market competitiveness.

While NVDA faces the brunt of this reaction, other chipmakers, including Advanced Micro Devices (AMD), Taiwan Semiconductor (TSM), and even Microsoft (MSFT), are also experiencing significant declines. Nvidia's stock is now poised to erase its modest 6.2% gain for the year and open at its lowest point since early October, despite remaining over 100% higher compared to a year ago.

The pullback may lead to an unwinding of bullish positions in the options market. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Nvidia's 50-day call/put volume ratio of 2.53 ranks in the 99th percentile, signaling elevated bullish activity that could exacerbate downward pressure.

Options trading could present an opportunity for investors weighing Nvidia's next move. With the stock's Schaeffer's Volatility Index (SVI) at 38% -- ranking in the low 2nd percentile of its 12-month range -- options are currently pricing in low volatility. Nvidia has a history of exceeding such expectations, as evidenced by its Schaeffer's Volatility Scorecard (SVS) rating of 76 out of 100.