Unusual Options Activity Highlights the Damage Done to the Blockchain (AMD, NVDA)

While few sectors outside of the hydrocarbon energy segment escaped the malaise of 2022 unscathed, the broader blockchain industry was remarkable for its severe implosion. To be sure, most of the attention is directed toward individual cryptocurrencies. However, that’s of little comfort to stakeholders of semiconductor firms Advanced Micro Devices (AMD) and Nvidia (NVDA).

Both companies compete vigorously in the graphics processing unit (GPU) subsegment. Though initially geared for capacity-intensive applications such as advanced gaming, GPUs garnered much relevance for their ability to undergird blockchain mining procedures (for proof-of-work consensus mechanisms). The leading crypto-mining enterprises will feature stacks upon stacks of GPUs, each humming along as they engage in an algorithmic race for transactional verifications.

Given how important GPUs are to supporting the decentralized and distributed consensus protocol of proof-of-work blockchain networks, it was practically inevitable that when the crypto market boomed, so too did GPU manufacturers like Advanced Micro and Nvidia. However, it was only until recently that investors realized how lucrative cryptos have been for these companies.

According to a report from German resource 3DCenter, sales volume and sales of graphics cards over the last 14 quarters (excluding the most recent Q3) allowed the corporate pair to generate income equivalent to six years of normal operations.

To be clear, this estimate stems from independent, third-party research. Still, what’s clear is that GPU companies benefitted handsomely from last year’s crypto surge. As digital asset valuations kept soaring, the incentive to participate in the backend business of the industry (i.e. crypto mining) likewise exploded.

Unfortunately, with the sector cratering, AMD and NVDA face viability concerns. Since the beginning of this year, the underlying stocks posted losses of 51% and 46%, respectively. Sure enough, the red ink splashed across cryptos captured the attention of bearish traders.

Unusual Options Activity Shines Spotlight on the Struggling Blockchain

Following the close of the Nov. 14 session, AMD and NVDA made up the ranks of unusual options activity. Below is the breakdown of notable transactions, beginning with AMD, which closed in the open market at $73.53.

• $74 puts with an expiration date of Nov. 18, 2022. The volume to open interest ratio was 27.94.
• $74 puts with an expiration date of Nov. 25, 2022. The volume to open interest ratio was 20.02.
• $75 puts with an expiration date of Nov. 25, 2022. The volume to open interest ratio was 14.40.

For Nvidia, which closed at $162.95, the unusual transactions are as follows:

• $150 puts with an expiration date of Dec. 2, 2022. The volume to open interest ratio was 8.78.
• $167.50 puts with an expiration date of Nov. 18, 2022. The volume to open interest ratio was 7.61.
• $162.50 puts with an expiration date of Nov. 18, 2022. The volume to open interest ratio was 7.01.

Both stocks feature predominantly bearish sentiment in the options arena. For AMD, its put/call open interest ratio is 0.93 while for NVDA, the ratio stands at 1.06. Typically, the delineation between optimism and pessimism is 0.70, with figures higher than this level indicating that more traders are acquiring puts than calls.

However, analysts maintain bullish consensus ratings for both companies. Regarding AMD, Wall Street experts peg shares as a “strong buy.” This actually represents an increase in sentiment from a consensus “moderate buy” three months ago.

In Nvidia’s case, analysts peg shares as a “moderate buy,” little changed from the same consensus rating three months ago.

The Crypto Ship Has Sailed for AMD and NVDA

Undoubtedly, because of the sharp losses in the crypto sector, the segment will almost invariably attract contrarian speculators. After all, cryptos have a tendency of bouncing back from the grave. And when they do, the upside can be meteoric.

However, it’s better to avoid buying AMD and NVDA based solely on the assumption that virtual currencies will recover soon. Please don’t misread this: AMD and NVDA could very well be discounted opportunities. But they may rise based on other non-crypto-related dynamics.

Earlier, I laid out the case for why investors should wait before they dive into discounted blockchain assets. If you think you’re seeing a great deal right now, you’ll probably see much better pricing sometime next year.

Fundamentally, monetary evidence suggests that the Federal Reserve ultimately represents the arbiter of crypto valuations. As I pointed out in my article, the real M2 money stock and the benchmark crypto price share a surprisingly strong correlation.

Additionally, with little evidence that the Fed is about to reverse course on its hawkish approach, investors have more reason to assume that virtual currencies will erode before they run higher again. Thus, it’s better not to fight the negative current when it comes to the ongoing crypto selloff.

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