Earnings Preview | Options Expose High Expectations for NVIDIA's Post-Earnings Moves

Stock prices may see larger-than-normal moves during earnings season, making it a potentially attractive time for options traders. For investors looking to trade against these moves, you should always keep track of how the options might shift after their earnings.

Although the earnings season has started to wind down, retailers and internet giants are still expected to release major earnings this week. The highlight of the week will come from Nvidia. On Wednesday, the leader in AI is expected to report.

- Earnings Release Date: Post-market on May 22

- Earnings Forecast: FY2025 Q1 revenue of $24.57 billion, up 241.65% year-over-year; EPS of $5.19, up 533.5% year-over-year

- NVIDIA's current implied move is ±9.7%, indicating the options market is expecting a post-earnings one-day move of 9.7%, with current option prices slightly overvalued. The stock has moved an average of ±7.4% on the last 12 earnings days, with a 67% chance of rising; the biggest movements were +24.4% and -7.6%. In the last four earnings reports, the stock closed higher three times, with results of +24.4%, +0.1%, -2.5%, and +16.4%.

Nvidia has substantial open interest in call options at the $950 and $1000 levels and put options clustered around $920 to $930. These concentrations suggest key resistance and support levels, respectively, that could influence the stock's near-term movement. The call options indicate trader optimism for a rise, which might cap gains as investors lock in profits near $950 and $1000, while the put options suggest downside protection around $920 to $930, potentially cushioning any declines.

BofA Securities expects Nvidia to deliver strong fiscal Q1 financial results, surpassing consensus estimates, but warns of potential near-term stock volatility due to several factors. These include a projected deceleration in sales growth for the July quarter, heightened China restriction risks in the second half of the year, limited upside on inference metrics, and a normalization of gross margins. Despite these risks, a solid launch of the Blackwell product and a compelling valuation could support the stock in the long term.

BofA anticipates Q1 sales to reach $26 billion (versus the consensus of $24.6 billion) and gross margins to peak at 77% before declining to 75%-76% in Q2.

"[Gross margins] peaking and decline is a sign of pricing pressure, unfavorable mix [more China H20 shipments and/or more inference units] and slowing demand/easing supply," BofA said in the note.

BofA maintains a buy rating on Nvidia with a price target of $1,100.

- Earnings Release Date: Post-market on May 20

- Earnings Forecast: Q1 revenue of $1.967 billion, up 14.3% year-over-year; earnings per share of $0.42, up 36.77% year-over-year.

- Palo Alto Networks' current implied move is ±10.2%, compared to an average stock price move of 14.1% on the last four earnings days, indicating that current option prices may be undervalued. The stock has a high probability of rising on earnings days, at 83%, with only the previous two reports showing declines (-5.4% and -28.4%).

- Earnings Release Date: Pre-market on May 22

- Earnings Forecast: Q1 revenue of 76.558 billion yuan, up 103.41% year-over-year; earnings per share of 9.66 yuan, up 74.13% year-over-year.

- Pinduoduo's current implied move is ±9.9%, compared to an average stock price move of 14% on the last four earnings days, indicating that current option prices may be undervalued. The stock has a high probability of rising on earnings days, at 67%; the last four reports have all closed up, with three instances of significant gains: +19%, +15.4%, +18.1%, and +3.5%.

Last Friday, Pinduoduo's option volume nearly doubled the 30-day average, with a call accounting for 68.3% of the volume. There was significant positioning in calls expiring on March 21 next year, with a strike price of $160, showing high trading volume and open interest at 10,000 and 60,000 contracts, respectively.

Bloomberg analysts expect Pinduoduo's online marketing and other revenues to grow over 38% year-over-year for the first quarter, with transaction services revenue surging by 267% year-over-year. However, aside from the impressive year-over-year figures, the analyst also anticipates a sequential decline in its two main businesses, with online marketing and other revenues expected to drop by 22.7% quarter-over-quarter, and transaction services revenue to decrease by about 5%.

Before significant corporate events such as earnings announcements, product launches, or clinical trial results, implied volatility tends to increase. However, after the news has been released, the implied volatility can drop significantly due to the sudden clarity in the market and the stock price reaction to the news. This phenomenon is referred to as IV crush.

IV crush can lead to a decrease in option prices because the Implied volatility is lowered dramatically. This decrease in option prices due to IV crush can be a risk for options traders who have purchased options at a higher price with the expectation of making a profit from a significant move in the underlying stock price. Conversely, IV crush may not be as prevalent if the option is undervalued and the stock price moves drastically, which can pose a risk for option sellers. It's important for traders to be aware of IV crush and factor it into their trading strategy when considering options trades around significant corporate events.

Not all options are affected equally by an IV crush. IV crush affects short-term option prices more than long-term option prices.

Nonetheless, it's important to note that trading options always involve risks, and investors should consult with a financial advisor before making any trades.