There’s a popular saying in the options box: Sell a tiny car, buy a Lamborghini.
It, of course, refers to the practice of selling dollar options cheaply out of the money and collecting the premium on a high-probability bet. As these tiny little things grow, you’ll earn a small fortune over time. Of course, there is a downside: the investors who bought these worthless options.
Nvidia Monday’s price action is a good example of this concept.
Options traders in Nvidia are in for another tough session as the stock plunges more than 6.5% on Monday from Thursday’s highs, rendering some of the most popular short-term contracts worthless again.
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Nvdia, 5 days
More than 15% of Nvidia options traded through midday Monday were contracts that expired at the end of the session, according to data compiled by SpotGamma. Among the most popular contracts were the 225 and 222.5 strike calls, each traded more than 220,000 times and set to expire worthless after closing in the money on Friday. It’s a repeat of Friday’s session, when $114 million of premium slipped out of the money in the 235-strike calls.
Despite the weakness, the bulls don’t seem fazed. Nvidia options were the fifth most traded in the market on Monday, behind benchmark indexes and Tesla, with more than 3 million contracts traded and a total premium value of over $1.3 billion. Of that, $1 billion came from calls.
Call volume on Monday exceeded put volume by more than double, although more calls were exchanged at the bid price or below, meaning they were likely sold, according to ThinkOrSwim data.
Still, the stock’s four largest options trades were all bullish call buyers of expensive, in-the-money contracts expiring on Friday, each worth a total of at least $10 million.
According to Cboe LiveVol data, traders expect a move of 6.25% based on implied volatility around earnings, which is in line with usual expectations but larger than the average realized move of 3.2%. A bigger-than-expected move could save options traders a lot of money.
Those with call contracts need a change: Nvidia’s values ​​have fallen over the last three reports, including a 5.5% drop in February.
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