Why Nvidia (NVDA) Stock Faces Sell-the-News Risk Following Its Q2 Earnings Report

Given the astonishing historical performance of semiconductor giant Nvidia (NVDA), it’s only natural that the general atmosphere for NVDA stock is optimistic, especially ahead of its second-quarter earnings report (scheduled for release on Aug. 26). First, you may consider the Barchart Technical Opinion indicator, which rates the ticker as an 80% Strong Buy, with a strengthening short-term outlook cited as evidence.

You can also look at the latest print. While a year-to-date performance of roughly 14% isn’t groundbreaking, NVDA stock had previously succumbed to an extended downturn. However, this dynamic appears to be reversing, with shares up 6% in the trailing month.

Next, you have to factor in how analysts love Nvidia stock, with the consensus currently pegged at just over $304. Fundamentally, experts highlight positives such as new, advanced semiconductor architectures, along with robust AI infrastructure capex commitments. Also, per Google Finance’s info page for NVDA, 35.5% of financial articles are bullish, while only 6.5% are bearish.

Of course, we have to keep in mind that a consensus of opinions — especially in a non-deterministic system like the equities market — isn’t necessarily the arbiter of truth. That is to say, it could very well be that NVDA stock is a buy. However, an abundance of optimistic opinions doesn’t automatically validate the underlying hypothesis.

What’s really worrying is that the smart money doesn’t seem particularly enthused about the post-earnings potential of Nvidia stock.

Bullish on NVDA Stock? The Smart Money Isn’t Biting

You’d think that for all the waxing poetic about generative AI and Nvidia representing a cornerstone investment that the most sophisticated market participants would be gobbling up NVDA stock. But if the volatility skew for the Aug. 28 expiration date — just two days after Nvidia’s Q2 report — is any indication, the picture is much more nuanced.

Essentially, the shape of the skew is that of a “smirk” — options traders are not only paying an elevated implied volatility (IV) premium for out-the-money (OTM) puts but the more OTM the puts are, the greater the IV. On the other end, the IV for at-the-money (ATM) calls is about the same as the IV for OTM calls.

In other words, the main priority of the smart money is to protect against downside risk. If it were true that sophisticated players were optimistic about Nvidia stock, you’d expect the smirk to point in the other direction; that is, OTM call IV should spike higher while OTM puts should be suppressed.

As circumstances stand now, the volatility skew is not structured to capture upside convexity. If I were just basing my opinion on the skew’s implications, I would say that the smart money fears a sell-the-news headwind.

It must be said that no indicator is a perfect representation of future outcomes. Nevertheless, the disconnect between an optimistic narrative and protective options positioning makes me want to rethink the timing of NVDA stock.

Should You Buy the Rumor?

Before I get accused of being bearish on Nvidia stock, keep in mind that on June 26, I introduced the idea of buying the 205/210 bull call spread expiring July 31. As a quick summary, NVDA incurred an extended downturn where the number of down sessions exceeded positive sessions, thus creating an order flow imbalance. Using statistical analysis from past empirical data, I calculated that the $210 strike enjoyed a higher probability of success than the market was assigning.

Back on June 26, NVDA stock closed at $192.53. On July 22, the ticker finished the day at $212.06. So far, Nvidia is moving as forecasted. Notice, though, that I wasn’t calling for pie-in-the-sky numbers. I kept it realistic because under the quantitative signal I was tracking, a bold call could not be mathematically justified.

I still have the same argument today. When I wrote the aforementioned article, I mentioned that Nvidia stock had printed only four up weeks over the last 10 weeks, creating a downward slope. This 4-6-D sequence has flashed 30 times since January 2019. When past data is filtered for this quantitative sequence, the estimated median price by the end of Aug. 7 is approximately $214.

Basically, that means out of the 30 times the 4-6-D signal has flashed (assuming a June 26 starting point), 15 outcomes would be expected to land above $214 on Aug. 7 and 15 outcomes below this threshold. So, if you really want to speculate, you might consider the 212.50/215.00 bull call spread expiring Aug. 7.

Here, the breakeven price is listed at $213.95, which translates to a probability of profit of 45.6%. That means the above spread is slightly underpriced relative to the risk that traders have historically taken under this quant setup.

Still, both the smart money and the hard data are telling a similar story: be careful about excess optimism toward Nvidia stock. There’s a limited opportunity here but it may be better to extract it prior to earnings.