On Monday, the largest options trade on NVIDIA's stock seemed to indicate that the turmoil surrounding this chip leader and its controversial CEO is being seen as an opportunity to buy in.
In a transaction about an hour after the market opened, involving option premiums of over $100 million, a trader exchanged an existing long call spread position for a larger position that covers NVIDIA's trading activities for the next five months.
The core position involved buying 52,000 call options with an exercise price of $195 that expired on February 19, worth approximately $57 million. While establishing this new long position, the trader also sold an equal number of call options with the same expiration date but an exercise price of $245, thereby reducing the cost of this transaction by $10 million. This net position is a call spread trade, which means that for NVIDIA to be profitable upon expiration, the stock price needs to rise above around $206, or about 15%. If the NVIDIA stock price reaches the exercise price of the sold $245 call options, it would mean a nearly 40% rebound in the stock price, returning to the historical high of $243 set on October 6.
According to the analysis of SpotGamma, this transaction is likely the result of performing a “roll” operation on an existing position with a strike price of $210/255 that was looking for a price increase. The latter position was valued at approximately $42 million and has since been closed out.
The founder, Brent Kochuba, stated over the phone: 'This person has lowered the strike price of this spread to a lower level, becoming more aggressive in order to obtain a higher delta, thereby gaining more upside exposure. The reason for trading on price spreads here is that volatility is quite high before the financial reports. This represents a significant increase in upside delta exposure.'
In options terminology, delta is used to describe the speed at which the option price responds to changes in the underlying stock price. After traders adjust their positions to a lower strike price, if NVIDIA's stock price rises, their profits will increase more quickly. In other words, this is a more confident trade, betting that the stock price of this chip manufacturer will rebound soon.
According to SpotGamma, the call option with an exercise price of $195 purchased for $57 million was the largest single option transaction on Monday's market. Data shows that among the top 20 option transactions ranked by dollar amount, 12 were from NVIDIA.
By midday, the overall capital flow surrounding this stock was on the rise. 57% of the option trading volume was related to call options, and it is likely that more than $660 million in call option premiums were initiated by buyers, according to SpotGamma data. In terms of trading volume, the most popular single contract was the call option with an expiration date on Monday and an exercise price of $180. For this contract, NVIDIA would need to rebound by 1.2% before closing to break even.
