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Tuesday, November 15, 2022 9:42:17 AM
By: Cheddar Flow | November 15, 2022
Nvidia Earnings Preview
Nvidia has a 1.1% weighting and is ranked #12 in the S&P 500 index. The outcome of Nvidia earnings has the potential to help drive the index higher or lower. Nvidia reports earnings after the close on Wednesday, November 16th. The street is expecting results of 0.71 EPS on $5.8B of revenue. This would imply an earnings contraction of 39% on EPS and 18% in revenue growth YoY.
The negative sentiment built into Nvidia earnings has the impact to cause an increase in share price if better than feared numbers are reported. Currently, since October 17th, Nvidia’s share price is up 40% on the month or $45. Using dark pool data, order flow, technical analysis, and fundamental analysis before an earnings release will give us the most optimal and informed trading strategy to use for the event.
Nvidia Fundamental Analysis
It is notable to mention why the 31 analysts who cover NVDA earnings have all given revisions and slower growth expectations throughout the quarter. In part, this is due to the recent $AMD earnings release which missed on both revenue and EPS on November 1st. The larger reason is due to the U.S. ban on the A100 and H100 semiconductor exports to China. In the recent fall product launch, Nvidia claims it will only impact $400m in sales for its current quarter. They also state they have a workaround for the U.S. export ban, with its A800 chip.
As shown in the chart below, AMD and NVDA are highly correlated stocks. The implied earnings move of AMD was 7.85% and the stock realized a -1.73% the next day, which allowed for a great earnings trade. So, now that the market has had exposure to AMD’s earnings will Nvidia earnings revisions be priced in?
Metrics and Analysis for Nvidia Earnings
The options market is implying a 7.85% move post-earnings announcement. The average realized move is 4.96% and the maximum realized move was 18.76%. Currently, there is a 2.89% higher earnings implied move than the average realized move. This means that there is a 37% theoretical edge by selling volatility through the event.
As shown in the straddle performance in the chart below, on average, buying a straddle before the announcement and selling the day after would have lost -199% of your initial investment over the last 4 years of earnings. That also means that selling a straddle before earnings would have made you 199% on average if you did so in every earnings announcement over the last 4 years.
Earnings Trade Strategy For Nvidia
Depending on your risk tolerance and the expected outcome of the trade, there are a couple of methods you can use here. The first would be an Iron Condor which is a risk-defined, directionally neutral strategy. The goal is to collect a premium upon entering the trade while believing that Nvidia will not move past the 7.85% implied move.
The other strategy to use would be a calendar spread which is also a risk-defined, directionally neutral strategy. The trade is entered with a net debit but carries a higher payout than the iron condor strategy. We will analyze each method below. As always, options are risky and you can lose 100% of your initial investment.
Nvidia Earnings Backtested
The data and charts presented are from the last 4 years of Nvidia earnings results. As you can see in the “moves” chart, which shows the earnings implied move over the last 4 years, we are at the higher end of the implied moves.
Also in the same picture, you can see that straddles consistently lose money. More notably, Nvidia is reporting Q3 earnings, in which the highest ever realized move during Q3 earnings results was 7.25%. Already the options market is overpricing Nvidia’s implied move...
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