Earlier today there was some fairly unusual options activity in NVDA that caught my eye on an otherwise quiet expiration Friday. A customer bought what traders’ affectionately refer to as a Call Stupid, where the cutomer buys multiple strikes in the same expiration. In this case, the trader made a very bullish bet when the stock was $18.75 by purchasing:
-15,000 of the June, 16 calls for 3.00, break-even at $19 on June expiration
-15,000 of the June 17 calls for 2.18, break-even at $19.18 on June expiration
-15,000 of the June 18 calls for 1.50, break-even at $19.50 on June expiration
-15,000 of the June 19 calls for 1.00, break-even at $20 on June expiration
For total of $7.68 in premium or about $11,500,000
What’s interesting about the trade is that three of the options that were bought were in-the-money and the highest strike for all intents and purposes is at-the-money. The trader is merely replicating a long stock position, but defining his risk to the downside while also minimizing decay (about .67 of extrinsic premium on average) by not buying out of the money options. Regardless, this trader is betting some serious loot that the stock will be above $19.42 on June expiration to even have a shot of making money.
Why might someone with a bullish stance structure the trade this way? Well just look at the near parabolic move in the last couple of weeks. The 6 month chart below shows NVDA’s 22% move higher in almost a straight line from the lows earlier in the month:
On a longer term basis, the 5 year chart shows the stock approaching a resistance level at $20:
One concern on that NVDA chart is that the stock has had several false starts in the past 5 years, where the market got optimistic in a hurry, and the rally fizzled just as quickly. The current rally is from a more stable base (NVDA traded between 12 and 17 for the past 2.5 years), but NVDA is still expected to earn around $1 per share in 2014 and 2015, similar to what it earned between 2011 and 2013.