Bank of America Recommends Nvidia Options to Hedge Against Market Volatility

As Nvidia prepares to release its first-quarter earnings this week, the entire stock market is poised for significant movement. Scheduled for after the closing bell on Wednesday, this earnings report has the potential to drive substantial shifts in stock prices, both upward and downward. Nvidia’s performance has been a key factor in the earnings growth of the S&P 500, making this announcement particularly crucial.

Nvidia’s impressive revenue and profit growth have been instrumental in the overall earnings increase of the S&P 500 over the past year. The chipmaker’s success, particularly in AI-focused GPUs, has accounted for a significant portion of the index’s earnings growth. Specifically, over the last 12 months, Nvidia’s earnings growth contributed to 37% of the S&P 500’s earnings per share growth. However, projections for the next 12 months suggest that Nvidia’s impact will decrease, driving just 9% of the S&P 500’s earnings growth.

This shift underscores the potential market volatility surrounding Nvidia’s upcoming earnings report. Given Nvidia’s substantial influence, the results could lead to a considerable market reaction.

Current options pricing suggests that Nvidia’s stock could move by approximately 8.5% following its earnings release. This is notably lower than the implied movements seen in previous Nvidia earnings reports, where options traders expected fluctuations of 14% to 26%. This reduced expectation reflects a more measured anticipation of volatility compared to past quarters.

Bank of America offers a strategic approach for investors looking to hedge against the potential market impact of Nvidia’s earnings. Rather than purchasing put or call options on major indices like the S&P 500 or Nasdaq 100, the bank advises buying options directly on Nvidia.

The rationale behind this recommendation lies in the cost-effectiveness and liquidity of Nvidia options compared to those of broader indices. Nvidia options tend to be cheaper, making them a more attractive hedge for investors concerned about the broader market’s reaction to Nvidia’s earnings.

“For those worried about the positive or negative impact of NVDA earnings on the broader market, NVDA options offer better value than hedging through indices like QQQ, SPY, and SMH (Semis ETF),” Bank of America stated.

Cost Efficiency

Nvidia options are generally less expensive than index options, allowing for a more cost-effective hedging strategy.

Liquidity

High liquidity in Nvidia options ensures that investors can enter and exit positions with ease, enhancing the flexibility and responsiveness of their hedging strategy.

Targeted Exposure: Hedging directly with Nvidia options provides more precise exposure to the specific risks associated with Nvidia’s earnings than the broader market.

The advice from Bank of America highlights the interconnectedness of individual stock performances and broader market movements. Nvidia’s role as a significant driver of the S&P 500’s earnings growth accentuates the importance of its earnings report. As investors brace for potential volatility, the approach of using Nvidia options as a hedge underscores a tailored strategy that addresses specific risks while potentially offering better value.

Furthermore, given Nvidia’s significant influence on the broader market, notably its contribution to the S&P 500’s profit growth, the next earnings report marks an important turning point. The fact that option pricing reflects a lesser expected shift than in recent quarters indicates a unique opportunity for strategic positioning. By focusing solely on Nvidia options, investors may acquire more accurate exposure to the earnings event’s outcome while avoiding the dilution impact inherent in broader index options.

As Nvidia’s first-quarter earnings report approaches, the anticipation in the market is palpable. The company’s substantial influence on the S&P 500’s earnings growth over the past year makes this a pivotal moment for investors. Bank of America’s recommendation to use Nvidia options as a hedge reflects a strategic, cost-effective approach to managing potential market volatility. By focusing on Nvidia’s specific risks, investors can navigate the uncertainties of this earnings season with greater precision and confidence.