By Capitalize on Nvidia’s Rise with Call Options
Undervalued Volatility Creates Opportunity
Bank of America states that buying Nvidia call options is a great way to benefit from the growth of the AI chipmaker’s stock. The global equity derivatives team at BofA noted that Nvidia’s share price has been steadily increasing since the impressive earnings report last week. This surge highlights the importance of having exposure to AI stocks, especially Nvidia, in order to keep pace with the market.
Upbeat Outlook on AI
The BofA team emphasized that the positive outlook on the AI industry and Nvidia’s significant role in it make upside potential the prevailing trend. They suggest that leveraging derivatives to participate in this upward movement is a wise strategy. Notably, the market is currently undervaluing the volatility aspect of call options.
Understanding Call Options
Call options grant investors the right to buy an underlying stock at a predetermined price known as the strike price. When evaluating the cost of an option, factors such as intrinsic value (based on how close the stock price is to the strike price), time value (the proximity to expiration), and volatility value (anticipated share price movement) come into play.
By considering these elements and the undervalued volatility, investors can capitalize on Nvidia’s growth trajectory through call options.
Option Markets Underestimating Range of Outcomes
BofA highlighted that option markets are “grossly underestimating the range of outcomes” for many AI-related stocks despite the rally following the release of ChatGPT in late November 2022.
Surprise Moves in Nvidia Shares
The market has continuously been surprised by the significant moves in Nvidia shares. Prior to last week’s earnings report, the option market had predicted a 9% move up or down for Nvidia shares by the end of the week. Contrary to this, Nvidia’s shares surged by 16.8% in the two days following the earnings report.
At the Money Call Options
According to the chart presented by BofA, only Advanced Micro Devices (AMD) and Tesla have 3-month at-the-money call options costing more as a percentage of the share price than Nvidia’s current options at 10%.
High Probability for Nvidia
Despite the high cost, the probability of breaking even since November 2022 is highest for Nvidia among the cohort, standing at an impressive 92%. This indicates a strong potential for upside gains.
Renting the Upside
While purchasing call options on NVDA or other AI-related companies may initially seem costly, it has been identified as a viable strategy to benefit from the current rally, as suggested by the BofA team.
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