Nvidia Earnings: Will the Results Be Spectacular Enough?

by Warren Seah

Nvidia, known for its incredible financial performance and share-price gains, is set to release its earnings report for the fiscal fourth quarter on Feb. 21. However, investors are beginning to feel nervous about whether these results will be impressive enough to further boost prices, or potentially even lead to a loss.

Seeking Protection through Options

Options markets are offering a solution for investors who want to protect their Nvidia positions without selling them off completely. They are providing an inexpensive way to purchase some protection for potential downside risks.

High Expectations and Projections

Wall Street analysts are anticipating Nvidia to report earnings per share of $4.57 from sales of $20.3 billion, a significant increase compared to the 88 cents EPS and $6.1 billion sales reported a year ago. This translates to a growth of over 400% in earnings and a sales expansion rate well above 200%.

These impressive growth figures have driven Nvidia’s shares up by approximately 220% over the past year, pushing its market capitalization above $1 trillion.

A Strong Print, but is it Already Priced In?

While the anticipation is for another strong earnings report, Susquehanna analyst Chris Rolland suggests that the market may have already factored in this near-term upside. The real point of debate lies in the extent of the beat that Nvidia can deliver.

Investors should tread carefully when expecting results that surpass forecasts by a large margin. Even for a company like Nvidia, there is a risk of disappointment if the numbers do not meet exceedingly high expectations.

An Appealing Strategy: Options Collar

To capture some of Nvidia’s recent gains at an attractive price, Susquehanna options strategist Christopher Jacobson proposes a stock options collar. This strategy involves owning the stock, selling out-of-the-money call options, and buying out-of-the-money put options. By implementing this approach, investors can manage potential downside risks while still benefiting from the stock’s overall performance.

In conclusion, Nvidia’s upcoming earnings report raises both excitement and caution among investors. As the market sets high expectations for the company’s continued growth, it remains to be seen whether Nvidia can surpass these lofty projections.

Stock Options: A Financial Tool for Investors

Stock options are a type of financial instrument that grants the holder the right to buy or sell a stock at a predetermined price on a specific date in the future. There are two types of options: call and put. A call option allows the holder to purchase a stock, while a put option gives the holder the right to sell it.

When an option’s strike price (the price at which the option can be exercised) is higher than the current trading price of the stock, it is considered “out of the money” for a call option. Conversely, if the strike price is lower than the stock’s trading price, it is considered out of the money for a put option.

Implementing a Protective Strategy: The Collar Approach

A strategy often employed by investors to protect their investments is called “the collar.” This approach involves selling a call option that expires in March with a strike price of $865, which is approximately 20% higher than recent levels. The money obtained from this sale is then used to buy put options with a $630 strike price, which is about 13% below recent levels.

The primary objective of implementing this strategy is to limit both potential gains and losses. By capping the upside of the stock at 20% until the options’ expiration while limiting the potential loss to 13%, investors can effectively mitigate risk. If the stock remains within the range of $630 and $865 during the weeks following earnings, this insurance policy essentially expires unused, providing added peace of mind.

Understanding Pricing Discrepancies: Why Put Options Are Generally More Expensive

Typically, put options tend to be slightly more expensive than call options due to inherent market dynamics. This pricing discrepancy exists because, in general, there is a greater possibility for things to go wrong than to go right in financial markets. This reflects our tendency as humans to often anticipate and prepare for potential downturns or disasters.

Options Trading: A Powerful Financial Tool

While options trading can be complex, it can also be a valuable tool for investors when used in moderation and with proper understanding. Options offer various benefits, including the provision of security in volatile markets. However, it is crucial for investors to have a solid understanding of options or seek professional advice before engaging in options trading.

Remember, options should be approached with caution and proper knowledge to ensure they contribute positively to an investment strategy.

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