Traders are bracing for big swings in Nvidia stock

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Traders are bracing for big swings in Nvidia’s stock price and the broader financial markets when the chipmaker reports first-quarter earnings on Wednesday.

Options activity around the stock has mushroomed amid a fierce rally that has seen Nvidia’s market capitalization grow more than sixfold to $2.3 trillion since early 2023, as the chipmaker has emerged as the top graphics manufacturer processing units that perform generative AI.

Current premiums in the options markets imply that traders expect an 8.6 percent swing in the stock price in either direction – equivalent to a market gain or loss of more than $180 billion – when markets open on Thursday after the company reports its latest results has published, according to Bloomberg data.

The combination of Nvidia’s enormous size and the volatility of its stock has given the company an outsize importance in determining the mood and direction of the broader market, analysts say.

“It’s Nvidia’s market, we’re all just trading in it,” said Steve Sosnick, chief strategist at Interactive Brokers. ‘If it gives any hint [at a slowdown]that would be very damaging to the entire market.”

Nvidia’s earnings have recently become market-moving events. JPMorgan analysts this week ranked an Nvidia profit loss behind only “recessionary or stagflationary” economic data and “extreme” investor positioning in a list of potential scenarios that could drag the U.S. stock market significantly lower.

Some of the stock’s biggest moves have come after the company reported results. Nvidia’s share price rose 24.4 percent during the session after reporting earnings last May, 16.4 percent in February and 14 percent following results a year earlier.

Charlie McElligott, managing director of cross-asset strategy at Nomura, said good results for Nvidia could be as good for equity markets as favorable inflation numbers. Both would “rekindle the euphoria,” McElligott wrote in a note to customers last week.

Nvidia’s enormous market power means its impact is being felt beyond the US stock market.

Metals traders will pay “an enormous amount of attention” to the company’s results, said Al Munro, a broker at Marex.

An emerging markets bond trader at a major U.S. bank said Nvidia’s profits had affected African government bond prices in the past. When stocks rise, “it moves the entire market and improves risk sentiment everywhere,” the trader said.

Traders are attracted to Nvidia because of its volatility – or “implied beta” in the jargon. The S&P 500, on the other hand, has been unusually calm for months.

Measured by dollar value, Nvidia options now regularly represent nearly a third of all U.S. options tied to a single company, and on some days nearly half, according to data collected by research group Asym500. In the first quarter, its average options volume of $115 billion was more than double that of second-place Tesla.

Nvidia’s shares “are expensive and volatile, but the options are liquid. Those are exactly the things you want to see as an options trader,” Sosnick said.

Since the start of the AI ​​boom in 2023, Nvidia’s implied beta has typically been between 3 and 4, indicating that for every 1 percent move in the S&P 500, Nvidia will rise or fall by as much as 4 percent. This makes it one of the highest beta securities in the US, according to Garrett DeSimone, head of quantitative research at OptionMetrics.

In recent days, options traders appear to have become more optimistic about Nvidia’s upcoming results. Data from Bloomberg shows that there has been an increase in the number of calls (which give the right to buy a stock at an agreed price) with a strike price of $1,000, a large premium to Nvidia’s current share price of $947.

That was boosted by three Wall Street firms – Stifel, Susquehanna and Barclays – all upgrading their target forecasts a few days before results.

Yet many of the world’s largest investors appear to have been cautious. Stanley Druckenmiller’s Duquesne family office cut its exposure to Nvidia by 72 percent in the first quarter, and Cathie Wood’s Ark Investment Management trimmed its position in February.

Hedge funds including Coatue Management, DE Shaw, Citadel Advisors, Two Sigma, Renaissance Technologies and Millennium also posted some gains in the first three months of the year, according to filings with the Securities and Exchange Commission last week.

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