There are stocks and then there are others Nvidia.
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The chip giant is almost an asset class unto itself, and that makes Wednesday night’s results a market event. But as investors prepare for the big picture, something strange is happening on the options exchanges.
When it comes to options markets, the conventions are almost always the same: investors pay for downside protection, making the implied volatility of out-of-the-money puts higher than that of equivalent calls. It is the fingerprint of a market that hedges first and speculates second.
Nvidia is currently flipping this script. Ahead of earnings, NVDA short-term calls trade at a premium to puts. A positive trend is really unusual in stocks. In fact, the market is pricing in more uncertainty for the uptrend than for the downtrend.
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Nvidia, YTD
For options traders, this represents a structural advantage worth taking advantage of. With the stock trading at around $222, the options market expects the stock to move around $14 by the end of the week. The $245 calls have $23 in circulation. The $205 puts are just $17 off the money. The calls are further away – and yet cost more. This gap is opportunity, and there are two ways to capitalize on it:
Trade 1:
For existing shareholders (or those buying the stock today), a free upside collar: Sell the $245 call at $1.15 to fund the $205 put. The call premium finances your protection against losses – free of charge. You limit your profit, but create a protective “floor” and the bill benefits you. Maximum win: +$23 (~10.4%). Maximum loss: −$17 (~7.7%).
Trade 2:
For bullish participants who only want to trade options with asymmetric risk/reward: the call spread of $210 / $240.
Buy the $210/$240 call spread for about $13. The implied move is about $14 – meaning you’ll almost break even if the stock doesn’t go anywhere, and potentially make $17 if the price goes up. An asymmetric bet with defined risk that offers 30% more upside than downside risk and has virtually no standstill falloff (loss) if the stock remains unchanged. Maximum win: +$17. Maximum loss: −$13. Press when it is flat
In short, the enthusiasm for Nvidia is creating unique opportunities in the options market. They don’t come around often.
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