Buying call options on Nvidia remains a good way to take advantage of gains in the AI chip maker's stock price since volatility is undervalued, according to Bank of America.
In a note published Tuesday, Bank of America's global equity derivatives team noted that Nvidia's NVDA,
The continued rise in share prices since last week's big earnings report means that keeping up with the market without sufficient exposure to AI stocks, especially Nvidia, has been an uphill battle.
“With the outlook for the AI wave and NVDA's central role remaining optimistic since last week's earnings announcement, the upside remains a sore trade,” the BofA team said.
They added that using derivatives to chase this rally remains a “prudent strategy” because the market continues to undervalue the volatility component of put options.
Call options give investors the right to buy an underlying stock at a certain level, known as the strike price.
To simplify, one way to determine the cost of an option is to look at the intrinsic value (determined by how close the stock trades to the option's strike price), time value (how long before the option expires), and volatility. Value (the more the underlying stock is expected to move, the greater the cost of volatility).
Options markets “significantly understate the range of outcomes” for many AI-related stocks despite the rally since ChatGPT was released in late November 2022, Bank of America said.
In essence, the market continues to be preoccupied with the size of the moves in Nvidia stock. For example, just before last week's earnings report, the options market was pricing in the possibility that Nvidia shares would rise or fall by approximately 9% through the end of the week. In fact, the next two days after earnings saw Nvidia shares rise 16.8%.
The chart below by Bank of America shows that only high-end AMD hardware,
And Tesla TSLA,
You have 3 months in the money call options that cost more as a percentage of the stock price than Nvidia's current price of 10%.
However, while the probability of breaking even since November 2022 for Tesla is only 60%, and 77% for AMD, Nvidia's probability is the highest of the group at 92%.
“As a result, although buying outright put options on NVDA (or other AI-related names) may have a degree of shock, it has proven to be a reasonably effective way to rent the upside in the current rally,” Bank of America said. a team.
