NVIDIA Corporation (NVDA), a dominant player in the semiconductor and AI space, remains one of the most closely watched stocks in the market. Its options activity, often reflecting the expectations and sentiments of traders, can offer valuable insight into the stock's future movement. With recent data from Trading Central’s Options Insight dashboard, let’s break down the current state of NVIDIA’s options volatility and what it means for traders.
1. Implied Volatility Rank: Low IV Means Cheaper Options
NVIDIA’s Implied Volatility Rank (IV Rank) currently stands at 12 out of 100, meaning its volatility is relatively low compared to historical levels. When IV Rank is low, it signals that options are less expensive, making it a potentially attractive time for options buyers, especially those expecting future increases in volatility. Historically, higher volatility results in pricier options, so if you’re looking to enter the options market on NVIDIA, now might be the time to do so before implied volatility rises again.
2. Volatility Levels: Lower Future Volatility anticipated
The implied volatility for NVIDIA is currently at 38.2, compared to its historical volatility of 54.7. This means that while the stock has experienced more volatility in the past, the market is pricing in a calmer outlook for the near future. In practical terms, traders are not expecting major price swings in the near term, though this could change with the stock’s upcoming earnings report in November.
3. Upside / Downside Volatility Bias: Slight Downside Expectation
The Upside / Downside Volatility Bias currently sits at 3.9 per cent. This positive bias points to an expectation of downside volatility. In simple terms, the market is slightly leaning towards the possibility of downward price movements. While this bias isn’t extreme, it could suggest that traders are pricing in some risk of a pullback, particularly as NVIDIA has already seen substantial gains this year and is trading at or near record highs.
4. Timeline Volatility Bias: Focus on Short-Term Volatility
Another important metric is the Timeline Volatility Bias, which shows a 1.7 per cent positive bias, indicating that the market expects higher volatility in the short term (less than 3 months). Short-term traders might find this data valuable, as it suggests that options with near-term expiration dates could see more action than those expiring further out.
5. Volatility History: Implied vs. Historical
Looking at the volatility history chart, we can see that implied volatility has been below historical volatility for several months. This discrepancy often signals that the market is underestimating potential future movement. The recent slight uptick in implied volatility suggests that traders may now be bracing for increased volatility after a quieter period.
6. Expected Price Movement: What the Market Expects by December 20
According to the data, the market expects a 17.5 per cent price movement in NVIDIA’s stock by the December 20 expiration. Bulls expect the stock to climb to around 166.04 USD, while bears are looking for a potential drop to 116.68 USD. This significant price range provides a clear picture of the volatility premium currently baked into options contracts and can help traders gauge potential risk and reward.
What Does This Mean for Options Traders?
Overall, the data suggests that NVIDIA’s options market is currently pricing in low volatility, but with earnings coming up and slight downside bias, there’s room for traders to position themselves for future movement. Whether you’re bullish or bearish, the key to success in options trading is understanding the volatility landscape, and right now, that landscape is full of potential opportunities for those who act strategically.
By carefully interpreting the volatility data, options traders can make informed decisions about which strategies to employ, whether it be buying calls, puts, or implementing spreads to manage risk while taking advantage of potential market moves.
If you're bullish on NVDA but want to limit your risk, the TC Options Insight tool has identified a 142-164 Bull Call Debit Spread expiring on December 20th. This strategy offers a Probability of Profit close to the ideal 50 per cent, which is often a target for debit spreads. This could be a great choice for traders anticipating an expansion of volatility in the coming weeks, especially leading up to the company's earnings report.
On the other hand, if you're looking to sell options and collect premium, NVIDIA’s options still offer some decent opportunities due to the 1.47 IV/HV spread ratio, meaning Implied Volatility (IV) is higher than Historical Volatility (HV). Traders expecting a contraction of implied volatility might consider a Covered Call strategy, particularly with the stock trading at its all-time highs. Instead of placing a limit order to cap profits, selling a covered call could provide an alternative to monetize the position. TC Options Insight identified a $164 strike Covered Call for December 20th, offering a credit of approximately $5.38 per contract.
This balance of strategies, either capitalizing on a potential upward move with a bull call spread or taking advantage of high premiums through a covered call gives traders flexibility based on their outlook and risk tolerance for NVIDIA’s future price movements.
Curious about how NVIDIA's volatility stacks up against its technology sector peers? The TC Options Insight Dashboard provides a comprehensive comparison table for easy analysis.
Read more about NVIDIA from a technical and fundamental perspective using other Trading Central Insights by one of our analysts here.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Options trading involves significant risk and is not suitable for all investors; losses can exceed the initial investment, Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
