Option traders are really looking forward to the split as it will bring down the hefty price of the stock, says a strategist.
Nvidia Corp. NVDA shares retreated on Thursday after the company’s market cap breached the $3 trillion mark in the previous session. An options strategist delved into the volatility seen in the stock ahead of the imminent split.
What Happened: Nvidia options are priced extraordinarily high with a stock price over $1000 and 50% implied volatility, said Matt Amberson, founder of Option Research & Technology Services, in an interview with Yahoo Finance.
“Options traders are really looking forward to the split,” the strategist said, adding that it will help them trade it a lot easier without the $1,200 price tag.
The beta of Nvidia is 1.7, which suggests the stock would outperform when the market goes higher and underperform when the reverse happens, Amberson said. Options traders could profit from not being short but being long spread so that traders can do this way out of the money spreads, he said.
A long spread gives traders the right to buy stock at strike price A and obligates them to sell the stock at strike price B if assigned. Selling a cheaper call with a higher-strike B helps to offset the cost of the call bought at strike A.
Amberson noted that Nvidia typically tends to go in one direction for some time, either a large upward move or a large downward move. “If you get some of these out of the money spreads, you can profit from that good risk-reward,” he said. Traders can get these out of the money spread for not too much money, and they can choose to buy a call and then sell it $5 higher, he said.
The same could be done for put too, and if one is neutral on the stock, both could be done, he added.
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Why It’s Important: Nvidia announced a 10-for-1 stock split that would be implemented after the close of trading on Friday. The stock will begin trading on a split-adjusted basis on Monday. A split makes a stock affordable for retail traders.
The AI stalwart has also announced a 150% increase in its quarterly dividend to 10 cents per share.
Given Nvidia’s dominant position in the market for AI chips, it has become the poster child of the AI revolution that is getting entrenched. Analysts expect the AI bubble to last for at least three to five years. The company has also been proactive in lapping up the opportunities before it.
As opposed to rivals, Nvidia offers a full suite of AI products, including hardware, software as well as services. It has also been on the cutting edge of innovation. On Sunday, Nvidia CEO Jensen Huang announced the company’s next iteration of AI accelerators, which will go by the name Rubin and launch in 2026.
Not all are convinced of Nvidia’s heady valuation. New York University Stern School of Business Professor Aswath Damodaran, known as Wall Street’s “Dean of Valuation” said in a recent interview that Nvidia’s intrinsic value doesn’t justify its current price tag. He, however, sees a plausible path to the valuation, provided the company can expand its market.
In premarket trading, the stock rose 0.43% to $1,215.13, according to Benzinga Pro data.
Read Next: Wall Street’s ‘Dean Of Valuation’ Still Thinks Nvidia’s Market Cap Is Too High But Says This Is A Story ‘We Could Find Plausible Paths To Get To $3 Trillion’
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