Bank of America: NVIDIA Q2 earnings may disappoint, consider this hedge for entry

Zhitong
2024.08.26 23:31
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Bank of America believes that NVIDIA's upcoming second-quarter financial report may disappoint, and suggests buying put options on the S&P 500 index as a better choice to hedge potential losses. Analyst Gonzalo Azis stated that, based on concerns about the Fed rate cut and market volatility, S&P put options will be more effective in protecting investors from macroeconomic factors. NVIDIA's revenue is expected to increase to $28.67 billion, with an adjusted earnings per share of $0.64

According to the financial news app Zhitong Finance, NVIDIA (NVDA.US) will release its second-quarter financial report this week. Bank of America stated that its performance may be disappointing and proposed a method to hedge the potential loss risk of the stock by purchasing put options on the S&P 500 index.

Gonzalo Asis, Vice President of Stock Derivatives Research Team at Bank of America, stated in a report last Sunday that investors "may underestimate the risk of disappointing performance" and that a "more attractive" way to hedge this risk is not by buying put options on NVIDIA, but by buying put options on the S&P 500 index.

With the market sell-off in early August, explosive growth in the volatility index (VIX), and current investor keen interest in the upcoming Fed rate cut, Bank of America sees the possibility of risks emerging.

Asis stated, "Compared to hedging based on NVIDIA, we believe that the S&P put options spread will better protect investors from this risk and its impact on the broader market."

Asis provided some reasons, noting that NVIDIA options imply a volatility range of 10% around returns, but since 2018, the stock has never dropped by more than 8% on reporting days.

Furthermore, the VIX spike to 65 on August 5 highlighted the vulnerability of the broader market's return to fragility, with the S&P 500 index often remaining fragile after such a significant shock.

S&P put options can protect investors from the impact of macro drivers such as the US August employment report and ISM Purchasing Managers Index to be released next week, and investors "do not need NVIDIA's poor performance to profit."

Asis mentioned that S&P options are relatively "cheaper" than NVIDIA options and released the following chart:

The AI chip manufacturer, valued at $3.1 trillion, is expected to announce its second-quarter results later on Wednesday, with revenue expected to more than double to $28.67 billion, and adjusted second-quarter earnings per share soaring to $0.64.

Bank of America stated that NVIDIA has already outperformed the S&P 500 index by about 5 percentage points this year, and its performance over the past six quarters has been highly correlated with its quarterly reports and stock indices such as the S&P 500 index, highlighting its market influence

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