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Explosive investor interest in artificial intelligence has catapulted Nvidia into the echelons of trillion-dollar companies and helped it end Tesla’s long reign as the most actively traded US options name.
The rolling five-day average notional value of options tied to Nvidia has soared above $100bn this year, according to numbers compiled for FT Alphaville by Asym500, a derivatives consulting firm.
That has helped push its shares up another 49 per cent this year – yesterday supplanting Alphabet as America’s third most valuable company, Meanwhile, Tesla options trading volumes have stayed relatively steady, with a five-day rolling average of around $50bn in 2024.
As you can see from the chart, this is quite the shift, even if Nvidia still has some ways to go to rival the insanity of Tesla in the day-trading frenzy of 2021.
Excepting index options, Tesla has been the most active corner of the US equity options market for several years, at times accounting for half of all US options tied to the stock of a single company, and with trading volumes often outstripping activity in its actual stock.
By 2021 the phenomenon was so extreme that some dubbed it part of broader a “Tesla-financial complex” that encompassed a tangled web of interlinked financial derivatives, structured products and copycat electric-vehicle companies.
But the Tesla options market has calmed down from the 2021 mania — when the five-day rolling average value peaked at over $250bn — and Tesla’s stock market value has deflated from a peak of over $1tn to about $600bn this year.
Meanwhile, Nvidia’s market capitalisation has quintupled just since the start of 2022 to over $1.8tn thanks to the stock market euphoria over artificial intelligence — a boom largely built on Nvidia’s chips.
In terms of the nominal number of options contracts being traded, Nvidia has only surpassed Tesla four days so far this year (most recently on Monday), notes Asym500’s Rocky Fishman, and the five-day rolling average is still below Tesla’s despite the recent boom.
However, Nvidia’s share price is three times larger than Tesla’s, which means that each options contract tied to the chipmaker is worth much more than each contract linked to the carmaker. Measured by the notional dollar value of options being traded, Nvidia started rivalling Tesla last year, and has been catapulted above it in 2024.
Nvidia has also dethroned Tesla as the most actively-traded name among clients of Interactive Brokers, both in terms of options and their underlying shares, notes Steve Sosnick, the brokerage’s chief strategist.
He argues that the spike in Nvidia options trading volumes might have been caused by some shareholders being wrongfooted by the wildness of its stock market rally.
Recently, activity by frustrated call writers and hedgers has been pushing NVDA’s options volume higher via an odd feedback loop. Understandably, many customers have been writing calls against their NVDA holdings. The problem for them is that the rapid run-up in the stock has put those calls in danger of being exercised.
That places the covered call writers in a difficult spot:, leaving them to choose between substantial capital gains tax liabilities — many of them short-term — or buying back their calls at a loss. Many are choosing to buy back those calls or roll them into another expiration, but covering those expiring near-term calls has added to the buying pressure in the stock. We’ll see if that persists after NVDA reports next week.
In an echo of the “Tesla-financial complex” — and an earlier mania for any stocks even vaguely tied to blockchain technology — any association with AI in general and Nvidia specifically can lift a stock, a phenomenon that Sosnick calls “weaponised FOMO”.
As Alphaville noted earlier this week, AI was mentioned 19 times in Arm’s latest investor presentation with analysts, which — coupled with a positive earnings report and a small freefloat — has helped its shares nearly double in 2024.
Arm’s desire to talk about AI makes sense, given that Microsoft, Alphabet and Facebook and Nvidia have in aggregate seen their aggregate stock market value rocket by over $4tn just since the start of 2023 — the equivalent of adding almost five Berkshire Hathaways, eight JPMorgans and nearly ten Walmarts.
Apollo’s Torsten Sløk argues that the AI hype might be beginning to fade, judging by the number of time iterations of AI have been mentioned in quarterly earnings calls.
However, that seems like a premature call. There are probably simply a limit to how many times a CEO or CFO can insert “AI” into consecutive earnings calls before they come off as blithering idiots.
The AI mania looks as strong as ever in the actual stock market, with plenty of evidence just this week that Nvidia is at its centre.
For example, On Tuesday the shares of small video tech company Beamr spiking as much as 1,556 per cent after it merely announced a partnership with Nvidia.
And yesterday Nvidia filed a 13F form revealing that it had taken stakes in a handful of companies (including Arm) sending their shares climbing in premarket trading today.
This is nuts, when’s the crash etc.
Further reading:
— Arm’s an AI stock now. When’s the crash? (FTAV)
— ‘Sell Nvidia’ (FTAV)
— Find someone who loves you like hedge funds love Nvidia (FTAV)
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