Options Alert: Can Nvidia Traders Turn Time into Money?

One big options trader is trying to turn time into money as Nvidia holds a key level.

This significant activity was detected yesterday in the semiconductor giant:

• Some 42,010 July 200 calls traded for $2.37 and $2.38 against open interest of 94,548 contracts.
• Some 42,010 September 195 calls changed hands at the same times for $14.30 and $14.35 against open interest of 17,446 contracts.

Calls fix the price where a security can be purchased. They can also be sold to collect premium.

Tuesday saw two pairs of buying and selling blocks at matching times. The coordination, sizing and open interest suggest that a covered-call position was rolled from July to September. Here's how it might have worked:

• An investor likely owns at least 4.2 million NVDA shares.
• He or she might have previously sold the July 200 calls to collect premium.
• The contracts probably lost value as the stock declined and expiration approached.
• The trader apparently bought back the July contracts and replaced them with a short position in the September 195s.

Making the adjustment collected an additional $11.95 of premium. It also lowered their exit price by $5, meaning they extracted $6.95 of time value. The strategy could earn about 20 percent if repeated every two months. But there are two tradeoffs.

First, being short calls caps upside. Even if NVDA rallies past $195, they won't benefit from any of the gains. Second, they still lose money if the stock falls sharply. 

Support in Place?

NVDA rose 0.7 percent to $196.93 yesterday. The stock has dropped 17 percent from its all-time high of $236.54 eight weeks ago, but is now bouncing at the top of its range in January and February. Prices also formed a bullish outside day at their 200-day moving average, which could make some investors think a longer-term uptrend remains intact. 

While the last set of numbers on May 20 beat estimates, investors have worried about its ability to keep growing over the next few quarters. That concern was exacerbated this week by a Bloomberg report that Chinese AI companies want to increase their use of domestic chipmakers. That could hurt demand for the California megacap.

The resulting rangebound moves can be frustrating for momentum traders in search of a clear directional trend. However, it can be suited for a neutral position like yesterday's at-the-money covered call. See this article for more on adapting the strategy to various market conditions.

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