Bank of America details the best hedge for a big stock-market move on Nvidia earnings

Bank of America details the best hedge for a big stock-market move on Nvidia earnings

A cyclist passes a sign outside an Nvidia office building in Santa Clara, Calif., Wednesday, May 31, 2023. (AP Photo/Jeff Chiu)Jeff Chiu/AP Photo

  • Nvidia’s first quarter results this week could move the entire stock market.

  • Its soaring revenue and profits have accounted for most of the S&P 500’s earnings growth over the past year.

  • Bank of America explained how investors can protect themselves against the risk of Nvidia’s earnings influencing the entire market.

All eyes are on Nvidia this week as the company prepares to report its first quarter results after the closing bell on Wednesday.

The chipmaker’s earnings report could cause a big move in the stock market, up or down, depending on how the results pan out.

The current options price implies that Nvidia will rise or fall 8.5% after its results, which is significantly lower than Nvidia’s previous earnings releases, when options traders implied a move of 14% to 26%.

Nvidia Q1 ai earningsNvidia Q1 ai earnings

Bank of America

Indeed, Nvidia and its successful line of AI-focused GPUs have had a massive impact on the S&P 500’s earnings growth. Over the past 12 months, Nvidia’s earnings growth has generated 37% of the growth of Nvidia’s profits. S&P 500 growth in earnings per share. But over the next 12 months, Nvidia’s earnings growth is expected to account for just 9% of the S&P 500’s earnings growth.

This dynamic highlights the potential impact Nvidia could have on the broader stock market this week, and Bank of America has a way to protect against risk.

Instead of buying puts or calls on major indexes like the S&P 500 and Nasdaq100Bank of America recommends investors purchase call or put options on Nvidia itself.

In other words, if an investor thinks the stock market will fall this week following Nvidia’s results, instead of buying puts on the S&P 500 or Nasdaq 100, they should buy puts on Nvidia, and vice versa with call options if they believe the stock market will rise.

“For those concerned about the impact (positive or negative) of NVDA earnings on the market as a whole, NVDA options offer better value than hedging through indices like QQQ, SPY, SMH (Semis ETF ),” Bank of America said.

The reason is that Nvidia options cost less than options on broader indices, according to the bank, likely due to strong liquidity and trading interest in the AI ​​giant.

“Don’t mess with proxies; hedge with NVDA options,” Bank of America said.

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