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Bank of America describes the best coverage for a big stock market move on Nvidia’s earnings

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

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

  • Soaring sales and profits have driven most of the S&P 500’s earnings growth over the past year.

  • Bank of America shared how investors can hedge against the risk of Nvidia’s profits storming the broader market.

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

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

Current options pricing implies that Nvidia will rise or fall 8.5% after earnings results, which is significantly lower than previous Nvidia earnings releases when options traders implied a 14%-26% move.

Nvidia Q1 AI earningsNvidia Q1 AI earnings

bank of America

That’s because Nvidia and its successful line of AI-focused GPUs have had a huge impact on the S&P 500’s earnings growth. Over the past twelve months, Nvidia’s earnings growth drove 37% of the S&P 500’s earnings per share growth. But the coming twelve months, Nvidia’s earnings growth is expected to drive just 9% of the S&P 500’s earnings growth.

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

Instead of buying put or call options on the major indices like the S&P 500 and Nasdaq 100, Bank of America recommends that investors buy call or put options on Nvidia itself.

In other words, if an investor believes that the stock market will fall this week based on Nvidia’s earnings results, instead of buying put options in the S&P 500 or Nasdaq 100, he should buy put options in 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 gains on the broader market, NVDA options offer better value than hedging through indices like QQQ, SPY, SMH (Semis ETF),” Bank of America said .

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

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

Read the original article on Business Insider

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