Playing the NVDA Earnings

The AI hype continues, and at the center is NVDA -- the godfather of AI -- is unstoppable. The most-watched stock in the stock market, weighing in at 5% of the S&P 500 Index, grew 115% since the beginning of 2024. During last Wednesday's earnings report, the company demonstrated its total market domination by easily beating already-elevated Wall Street analyst expectations and, for good measure, also announced a 10-for-1 stock split.

Bullish Outlook

My outlook is bullish for NVDA -- went up 248.76%, 583.3%, and 2,854.1% for the last 12 months, three years, and five years, respectively -- and I was predicting that the NVDA earnings report will be a blockbuster. 

Many different strategies are possible heading into the earnings report. For example, I could buy shares of stock of NVDA at $949; 100 shares of NVDA will cost approximately $94,900. The problem with this approach is that it is too expensive and has no built-in hedging. Alternatively, buying an ITM (In The Money) CALL option will be cheaper and has hedging built-in. On May 20, the "NVDA May 24 945 CALL" may be purchased at a $47.35 premium. Since an option contract represents 100 shares of stock, the total cost of the CALL option is $4,735 (100 shares X $47.35). It is cheaper, but it is still expensive. Is there another way?

Vertical Spread Strategy

Yes, there is. I decided to use the Bull Call strategy, also known as Long Call Vertical Spread. Let me give you a quick summary of how I used this strategy. The idea is to defray the $4,735 cost of the CALL option. I sold for $1,830 the OTM (Out Of The Money) "NVDA May 24 995 CALL" at a $18.30 premium. Instead of spending $4,735 for the single 945 CALL option, I spend only $2,905 ($4,735 - $1,830) for the Bull Call (945/995 strike) strategy.

The Bad News

Had NVDA disappointed in its earnings report and the stock price tanked below $945, then both CALL options would be OTM (Out Of The Money), expire worthless, and I lost the entire $2,905 I spent for the Bull Call.

Break Even Price

If, at expiration, NVDA trades at $974.05, the OTM 995 CALL I sold will again expire worthless, and I will not have any obligation (remember, I still keep the $1,830 premium). The ITM 945 CALL will be worth $2,905 (100 shares X $29.05 Intrinsic Value), the same amount I paid: a wash. 

The Good News

The Bull Call makes money when NVDA trades above $974.05 at expiration. For example, at $984.05, the Bull Call has a $10 Intrinsic Value ($984.05 - $974.05) and gains $1,000 (100 shares X $10 Intrinsic Value). How about when NVDA is trading at $995.05? Will the Intrinsic Value be $21.00 (995.05 - $974.05) and gains at $2,100? The answer is no. The 995 CALL sold, in effect, puts a ceiling on the possible gains. The maximum Intrinsic Value of the Bull Call is $20.95 ($995 strike - $974.05 break even), and the maximum gain is $2,095 (100 shares X $20.95 Intrinsic Value).

Conclusion

NVDA closed at $1,064.69 yesterday at expiration, going past the 995 short strike. Both 945 and 995 strikes were ITM (In The Money), and the Bull Call gained the maximum of $2,095: 72.11% profit ($2,095 / $2,905 capital) in just two days. Not bad.