NVIDIA Call Options Heat Up Ahead of Historically Bullish Month

Options traders are buying more NVDA calls ahead of earnings

Managing Editor
Jul 31, 2017 at 2:54 PM
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The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Stocks highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. Two names of notable interest are chip stock NVIDIA Corporation (NASDAQ:NVDA) and Snapchat parent Snap Inc (NYSE:SNAP) . Here's a quick look at how options traders have been placing bets on shares of NVDA and SNAP. 


MAO July 31

NVDA Stock Dips Ahead of Historically Bullish August

At last check, NVDA stock was down 2% to trade at $161.18, after Wells Fargo downgraded the U.S. semiconductor sector to "sector weight" from "overweight." However, NVDA has tacked on 52% year-to-date, and recently shot to a record high of $169.92 last Wednesday. What's more, NVIDIA stock is one of the best stocks to own in August, historically, and the company will report earnings next Monday. 

NVIDIA's surge up the charts has short sellers rethinking their strategy. Short interest has decreased by 22% during the last two reporting periods, and accounts for only 3% of the stock's total available float. Analysts, however, remain cautious. Of the 27 brokerages covering NVDA, 11 still rate it a "hold" or a "strong sell." This leaves the door open for upgrades to lure more buyers, should the chipmaker report strong earnings next week. 

Options traders have been flocking to NVDA calls. Over 583,568 call contracts have been exchanged in the past 10 trading days, compared to 405,758 puts. The weekly 8/4 167.50- and 170-strike calls have seen noticeable open interest changes, with about 4,500 and 3,700 contracts, respectively, added during the past two weeks. "Vanilla" buyers of these out-of-the-money calls expect NVIDIA stock to extend its quest for record highs by the end of the week, when the contracts expire.

The good news for options traders is NVDA stock has exceeded their volatility expectations during the past year, as it's Schaeffer's Volatility Scorecard (SVS) sits at 88. However, with earnings looming, volatility expectations are on the rise; the security's 30-day at-the-money implied volatility has jumped to 52.1% -- in the 88th percentile of its annual range.

Lockup Expiration Sends SNAP Lower

Snap stock is currently down 2.6% to trade at $13.45, and earlier touched a record low of $13.10, as its IPO lockup period expired today, allowing early investors and employees to sell for the first time since March. It's been a rough start for SNAP stock, which is down nearly 21% from its IPO price of $17. 

SNAP stock remains under heavy fire from short sellers. Despite short interest decreasing by 4% during the latest reporting period, short interest still accounts for 68 million shares, or close to 37% of the stock's total available float. At SNAP's average daily trading volume, it would take five sessions to repurchase all of those pessimistic positions. 

In the options pits, it should be of no surprise that traders have been favoring puts. Over 585,808 options have been exchanged in the past 10 trading days, of which 318,863 were puts. The front-month August 17 put -- which aligns with Snap's IPO price -- is home to notable open interest, with over 21,000 contracts outstanding. Buyers of these puts are expecting SNAP to continue to trade below its IPO price in the near term, which includes the Snapchat owner's first public earnings report, slated for Aug. 10.

Today, however, SNAP call options are outnumbering puts, and flying off the shelves at twice the average intraday rate. Weekly 8/4 calls are seeing notable action, accounting for the four most active options so far today. Buyers of the near-the-money calls are likely betting on Snap stock to bounce from its post-lockup lows.

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