Traders brace for big swings in Nvidia shares

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Traders are bracing for big swings in Nvidia’s share price, and wider financial markets, when the chipmaking giant reports first-quarter earnings on Wednesday.

Options activity surrounding the stock has mushroomed amid a ferocious rally that has seen Nvidia’s market cap increase more than six-fold to $2.3tn since the start of 2023, as the chipmaker has emerged as the go-to manufacturer of the graphical processing units that power generative AI.

Current premiums in options markets imply that traders are anticipating an 8.6 per cent swing in the share price in either direction — equivalent to a market gain or loss of more than $180bn — when markets open on Thursday after the company publishes its latest results, according to Bloomberg data.

The combination of Nvidia’s enormous size and the volatility of its stock has given the company outsize importance in determining the mood and direction of the wider 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 even hints [at a slowdown], that would be very damaging for the whole market.”

Nvidia’s earnings have recently become market-moving events. Analysts at JPMorgan this week ranked an Nvidia earnings miss behind only “recessionary or stagflationary” economic data and “extreme” investor positioning in a list of potential scenarios that could drag the US stock market meaningfully lower.

Some of the stock’s biggest moves have come after the company reports results. Nvidia’s share price rose 24.4 per cent in the session after its earnings release last May, by 16.4 per cent in February and by 14 per cent after its results a year before. 

Charlie McElligott, managing director of cross-asset strategy at Nomura, said a good set of results for Nvidia could prove as beneficial for equity markets as benign inflation numbers. Both would “re-engage euphoria”, McElligott wrote in a note to clients last week.

Nvidia’s huge market clout means its impact is felt beyond the US equity market.

Metals traders will be paying “a tremendous amount of attention” to the company’s results, said Al Munro, a broker at Marex.

One emerging market bond trader at a large US bank said Nvidia earnings had in the past moved prices of African sovereign debt. When the stock rallies, “it moves the whole market and risk sentiment everywhere improves”, the trader said.

Traders are drawn to Nvidia by its volatility — or “implied beta”, in the jargon. The S&P 500, in contrast, has for months been unusually calm.

By dollar value, Nvidia options now regularly account for almost one-third of all US options tied to a single company, and on some days accounted for closer to half, according to data gathered by research group Asym500. In the first quarter, its $115bn average notional option volume was more than double second-place Tesla’s. 

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

Since the AI boom began in 2023, Nvidia’s implied beta has typically ranged between 3 and 4, indicating that for every 1 per cent move in the S&P 500, Nvidia will rise or fall by as much as 4 per cent. 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 bullish about Nvidia’s upcoming results. Bloomberg data shows there has been an increase in purchases of calls — which confer the right to buy a stock at an agreed price — with a $1,000 strike price, a large premium to Nvidia’s current share price of $947.

That was reinforced by three Wall Street firms — Stifel, Susquehanna and Barclays — all upgrading their target forecasts days before the results.

Yet many of the world’s largest investors appear to have erred on the side of caution. Stanley Druckenmiller’s Duquesne family office slashed its Nvidia exposure by 72 per cent in the first quarter and Cathie Wood’s Ark Investment Management cut its position in February. 

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