It refers of course to the practice of selling dollar cheap out of the money options and collecting the premium for a high probability bet. As those tinies grow, you make a small fortune over time. Of course, there’s a flip side to that, the investors who bought those worthless options.
Nvidia price action Monday is a good illustration of that concept.
Options traders in Nvidia are on pace for another rough session as the stock drops Monday, down more than 6.5% from highs on Thursday and rendering some of the most popular short-term contracts worthless – again.
Nvdia, 5-days
Bulls don’t seem dismayed despite the weakness. Nvidia options were the fifth-most traded in the market Monday, trailing the benchmark indexes and Tesla, with more than 3 million in contracts traded and total premium worth over $1.3 billion. Of that, $1 billion was tied to calls.
Call volume outpaced puts by more than double on Monday, though more calls were exchanged at the bid or below, meaning likely sold, according to ThinkOrSwim data.
Still, the four biggest options trades in the stock were all bullish call-buyers of expensive, in-the-money contracts expiring Friday, each totaling at least $10 million.
Traders expect a 6.25% swing based on implied volatility around earnings, on par with usual expectations but larger than the average realized move of 3.2%, according to Cboe LiveVol data. A larger-than-expected move might save options traders a lot of money.
For those holding call contracts, they’ll need a change of pace: Nvidia’s dropped after the past three reports, including a 5.5% decline in February.
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