Short Sellers of Nvidia Put Options Are Making Huge Profits

Nvidia (NVDA) stock has held up reasonably well since its Q2 earnings report was released on Aug. 23. As of Friday, Aug. NVDA stock was at $460.18, down $11.02 from $471.16 on Aug. 23, or just 2.34%. 

However, investors must be expecting NVDA stock to tumble, as its put premiums are at very high levels. As a result, short sellers of its put options, are making huge profits. This options trading strategy is likely to continue to make good money.

In short, Nvidia reported record revenue of $13.51 billion, up 88% from Q1, and which was 101% higher than a year ago. Moreover, and probably more important, its free cash flow (FCF) came in at an astounding level of $6.048 billion for the quarter. That was 2.89x the $2.643 billion in made in Q2 2022.

In other words, Nvidia is gushing forth cash, just as we discussed in our previous articles. In fact, there is good reason to believe that NVDA stock could hold up well going forward.

Why NVDA Stock Could Hold Up

One reason is that NVDA stock is actually at a reasonable valuation, given its history. For example, Morningstar reports that its average forward price-to-earnings (P/E) multiple over the past 5 years has been 41.2x.

That compares favorably with its existing P/E multiple. Seeking Alpha shows that the average earnings per share (EPS) forecast for 2023 is $10.82. That puts NVDA stock on a forward P/E multiple of 42.5x, close to the Morningstar average multiple.

In addition, analysts forecast earnings will skyrocket 46.8% in 2024 to $15.88 per share. That lowers its forward P/E to just 29x, well below its historical 41x multiple. Moreover, over the next 12 months, the average EPS forecast is $13.35 per share. that means its forward P/E for the next 12 months is just 34.5x.

So, if NVDA stock were to rise to 41x earnings over the next 12 months, its price target would be $547.35 (i.e., $13.35 x 41x). That is 19% over today's price.

Analysts Predict Higher NVDA Prices

Another reason is analysts expect NVDA stock to rise. The average price target shown on Yahoo! Finance as $618.04. That is a survey of 43 analysts from Refinitiv. It implies that NVDA stock will rise by $157.86, or +34.3%.

But more important than all of this, investors simply need to look at its put option premiums. Their high level allows short sellers to make money by selling deep out-of-the-money (OTM) put options in near-term expirations making good money.

Shorting OTM Puts in NVDA Stock

For example, in our last article on Aug. 1, “Nvidia Stock Refuses To Fall - Making Its Puts Attractive To Short Sellers,” we recommended shorting the $460 strike price for the period ending Aug. 25. Since NVDA closed at $460.18, this strike price ended up in-the-money.

That means the investors who collected $27.83 shorting those puts in just 25 days made a 6.05% gain (i.e., $27.83/$460.00 strike price). That works out to an annualized return of 72.6% per annum if the trade can be repeated each month at these high put premium levels.

Moreover, later in the article we also suggested closing that trade out and shorting the $450 strike price puts for expiration on Sept. 1. At the time, the put premium was $23.73, so the expected yield was 5.27% (i.e., $23.73/$450.00).

Today, those puts are trading for just $6.53 per put, down $17.20 from the initially shorted premium of $23.73. In other words, with just 5 days to go, most of the profit from that trade has been already made.

It might make sense then to close that trade out and short a further out expiration put option. For example, the $435 strike price put options expiring on Sept. 22, 27 days from now, trade for $11.03 per put. 

That strike price is still 5.47% below today's price (i.e., $435.00-$460.18, or -$25.18/$460.18 = -5.47%). It provides good protection in case NVDA keeps dropping. 

However, the put option premium is so high that the investor's breakeven price is just $423.97 (i.e., $435-$11.03). So, the investor has a breakeven that is $36.21 below today's price, or 7.87% out-of-the-money (OTM). That provides very good protection.

NVDA Puts - Expiring Sept. 22 - Barchart - As of Aug. 25

Moreover, the investor makes a yield-to-expiration of 2.54% (i.e., $11.03/$435.00). That works to an annualized return of 30.5% if this trade can be repeated every month for a year.

Even if the investor closes out the Sept 1 trade and spends $6.53, the net premium received is $4.53. That works out to a yield of 1.03% over the next 27 days (i.e., $4.53/$435.00 strike price).

This shows that there are good ways to make money shorting OTM puts in NVDA stock, despite its high valuation.

More Stock Market News from Barchart

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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