Investors May Profit from Nvidia’s AI Surge by Undervaluing Options Volatility

Opportunities to capitalize on Nvidia's stock surge are currently being overlooked in the options market, according to insights from Bank of America. Investors seeking profit from the AI chipmaker's progress might find value in purchasing Nvidia call options.

Market Underestimates AI Stock Volatility

The BofA global equity derivatives team points out that since Nvidia's impressive earnings report, its share price has continued to climb. This movement has made it increasingly challenging for market participants to maintain performance without sufficient exposure to AI-centric companies like Nvidia.

The anticipation for AI developments and Nvidia's pivotal role has kept market sentiments high. BofA analysts suggest that this unyielding momentum makes buying on the upside an attractive yet perhaps overlooked option.

Why Derivatives are a Smart Move

The experts at BofA propose that derivatives, particularly call options, are smart investments under the current market conditions. These investment tools are not fully reflecting the potential volatility, which means that their price may be undervalued relative to the possible gains.

Call options are contracts that give the bearer the right, but not the obligation, to buy a stock at a preset price, the strike price, within a specified period. The cost of an option is normally predicated on intrinsic value, time value, and volatility value. More expected movement in the underlying stock typically raises the cost of options due to increased volatility—yet this doesn't seem to be fully priced in for Nvidia's stock.

Market Misjudgment of AI-Related Stocks

Nvidia’s rapid share increase post the release of ChatGPT in November 2022 has caught the options market by surprise, showing a persistent underestimation of the company’s potential price movements. For instance, despite the market's projection of a 9% swing post-earnings, Nvidia’s shares notably leapt by 16.8% in just two days after the earnings announcement.

Comparatively, out of Nvidia, Advanced Micro Devices, and Tesla, Nvidia’s call options are a bargain relative to their share price, with a remarkable 92% likelihood of breaking even since last November, versus 60% for Tesla and 77% for AMD.

Despite the apparent 'sticker shock’ of Nvidia’s call options, BofA concludes that they are a worthwhile investment for harnessing the potential rally in AI stocks.

Nvidia, AI, Options