NVIDIA will set off a "big wave" this week, and Bank of America will teach investors how to hedge volatility

Zhitong
2024.05.21 08:03
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Nvidia is preparing to announce its first-quarter performance this week, with its stock price expected to rise or fall by 8.5%. The company's profit growth has a significant impact on the earnings per share growth of the S&P 500 index. Bank of America recommends that investors buy Nvidia's own call or put options to hedge risks. The cost of Nvidia options is lower than that of index options, so investors should use Nvidia options for hedging

Zhitong Finance APP noticed that all eyes are on NVIDIA (NVDA.US) this week, as the company is set to announce its first-quarter earnings after Wednesday's closing.

The company's earnings report could lead to a significant market rally or decline, depending on its performance.

Current option pricing implies that NVIDIA's stock price will rise or fall by 8.5% after the earnings release, which is significantly lower than the 14%-26% volatility range implied by options traders in previous NVIDIA earnings releases.

This is because NVIDIA and its successful AI-focused GPU product line have had a significant impact on the earnings growth of the S&P 500 index. Over the past 12 months, NVIDIA's earnings growth has driven 37% of the earnings growth per share in the S&P 500 index. However, in the next 12 months, NVIDIA's earnings growth is expected to account for only 9% of the earnings growth of S&P 500 index constituents.

This dynamic highlights the potential market volatility impact NVIDIA may have on the overall stock market this week, and Bank of America has a way to hedge this risk.

Bank of America recommends that investors buy call or put options on NVIDIA itself, rather than buying put or call options on major indices such as the S&P 500 index and the Nasdaq 100 index.

In other words, if investors believe that the stock market will decline this week due to NVIDIA's earnings report, they should not buy put options on the S&P 500 index or the Nasdaq 100 index, but should buy put options on NVIDIA, and vice versa if they believe the market will rise.

Bank of America stated, "For those concerned about the impact of NVIDIA's profits on the overall market (positive or negative), NVIDIA options are more valuable for hedging than hedging through indices such as the S&P 500 and Nasdaq."

The bank explained that the reason is that the cost of NVIDIA options is lower than that of broad market index options, which may be due to the strong liquidity and trading interest of this AI giant.

Bank of America said, "Don't bet on indices; hedge with NVIDIA options."

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