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Nvidia’s Earnings Report Approaches
For those considering tactical overlays, a short overlay can offset potential earnings-induced pullbacks, with risk managed by setting predetermined stop-loss and target levels. Beginners are advised to avoid complex strategies like premium selling, which carry higher risks due to potential big price swings. It is crucial to prepare, plan exits prior to investing, and align hedging activities with personal risk tolerance, ultimately ensuring that one’s portfolio remains resilient to the volatility that can accompany earnings announcements.
With Nvidia’s earnings coming this Wednesday, August 27th, we are facing a familiar but critical moment. The stock’s valuation is high because expectations are enormous, meaning even a spectacular report might not be enough to push it higher. Therefore, risk management for the next few weeks is more important than trying to predict the outcome.
We’ve seen this play out before, especially during the massive run-up through 2024 that led to the 10-for-1 stock split last June. Looking back at the May 2024 earnings, the options market was pricing in a huge move of around 8.5%, and the stock actually jumped over 9% the next day. This history shows that volatility is high for a reason, and preparing for a significant price swing is a wise move.
For those of us holding shares, the simplest response is to buy insurance for the week. A protective put gives us a floor, limiting our downside if the numbers or guidance disappoint investors. We pay a premium for this safety, but it allows us to hold our long-term position without the emotional stress of a potential gap down.
Strategic Approaches Post Earnings Announcement
Given how expensive options are right now due to high implied volatility, a collar is a very practical strategy. By selling an out-of-the-money call option, we can use the premium collected to pay for most, or all, of the protective put we are buying. The trade-off is that we cap our potential gains for the week, but it effectively sets a defined price range for our stock through the event.
If we believe the stock will either rise or stay flat, selling a covered call is another approach. This generates immediate income from the high option premiums, which can cushion a small dip in the stock price. We must be comfortable, however, with the possibility of having our shares sold if the stock rallies strongly past our chosen strike price.
Looking past this Wednesday, the most significant opportunity for derivative traders will come right after the announcement. Implied volatility will collapse, in an event known as “IV crush,” making options much cheaper. This is the time to consider selling cash-secured puts or put spreads on any dip, as it allows us to collect premium or acquire more shares at a price we like, with volatility on our side.
