Nvidia's Option Trades Mirror Uncertainty as UBS Sees Slowing AI Spending: Options Chatter

$NVIDIA (NVDA.US)$'s options market reflects the uncertainty that investors and large speculators are grappling with amid a growing debate over the trajectory of spending on artificial intelligence buildout.

UBS Global Equities Chief Investor Officer Ulrike Hoffmann-Burchard reportedly expects a deceleration in the growth of capital expenditures by hyperscalers that could hurt some of the companies enabling the AI buildout. That came just days after Semiconductor Industry Association CEO John Neuffer forecast that the global sales of the industry could climb to about $1 trillion this year, from a record $791.7 billion last year.

(To see Nvidia's options chain, click here. For the options market page, click here.)

(ICYMI, read Apple Attracts Millions of Dollars in Bullish Call Option Trades: Options Chatter)

At 10:47:09, a multi-leg transaction was posted that had both a bullish and bearish tilt, a sample of how institutional investors and large speculators use options in risk management. One of the trades involved the $4.5 million purchase of put options that give their holder the right to sell 450,000 Nvidia shares at $190 each in 30 days.

At the same time, another block trade for the sale of $2.25 million in put options with a strike price of $180 was recorded. That could mean the seller of the $180 put options was simply rolling his or her position to the contract with higher strike price of $190.

The block trade of 4,500 put options with a strike price of $190 is almost 7X the open interest of 664 contracts, signaling it's a new position. Each option covers 100 shares. That transaction was posted before the stock price fell below that $190 strike price, bolstering the odds that the contract could stay in the money before it expires on March 13.

That part of the multi-leg transaction has a 38.4% profit probability for the buyer, based on the current implied volatility. The breakeven level for anyone coming into the market at the time this column was written is $180.175 per share. That means Nvidia shares would need to fall below that level for the put options to be profitable for the buyer.

In case the stock tumbles below that level, the trade, on its own, has a maximum profit potential of $18,015 per contract of 100 shares. If Nvidia rallies, the maximum loss potential is about $985 per contract.

While Bloomberg Intelligence analysts expect big spenders including $Microsoft (MSFT.US)$, $Alphabet-A (GOOGL.US)$, $Amazon (AMZN.US)$ , $Meta Platforms (META.US)$ and $Oracle (ORCL.US)$ to sustain their capital expenditures growth to more than $4 trillion through 2030, they warned that the move could drain their cash reserves or fuel large-scale debt sales.

Google parent Alphabet has already done a shelf filing with the Securities and Exchange Commission for its debt offering. The tech giant plans to sell a rare 100-year bond denominated in sterling as part of its huge debt sale to help fund its $185 billion AI spending this year.

"Net excess free cash flow (after dividends and anticipated stock buybacks) is likely to be in deep negative territory for some, suggesting funding needs if issuers do not want to dip into cash holdings," Bloomberg Intelligence credit analysts Robert Schiffman and Alex Reid wrote in a note Tuesday. "Despite considerable balance sheet cash reserves, we anticipate large-scale AI debt issuance will be prevalent during the remainder of the year."

The mounting debt load is part of the reasons tech giants have seen a recent selloff. UBS's Ulrike Hoffmann-Burchardi thinks hyperscalers could win over investors if they would slow their capex growth, according to a Bloomberg report.

Do you think Microsoft, Meta, Amazon and Alphabet will listen and pare down their spending plans and what will that mean for Nvidia? Share your thoughts in the comments section and let your voice be heard by voting below. If you want to read more options columns like this one on Apple or this one on TSMC, follow me here, where you can also find my column that tracks short sellers' trading volume and other interesting stories on some of the biggest stocks.

Disclaimer: Options trading entails significant risk and is not appropriate for all customers. It is important that investors read the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period. Certain complex option strategies carry additional risk, including potential losses that may exceed the original investment amount. If applicable, supporting documentation for any claims will be furnished upon request.

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