Justin Sullivan
When Nvidia (NASDAQ:NVDA) unveils its Q2 results this week, Bank of America (BofA) is raising a cautionary hand.
According to BofA, investors might be downplaying the risk of potential disappointment. The prudent path to mitigate such a risk, noted Gonzalo Asis, BofA’s vice president of equity derivatives research, is perhaps not through directly hedging against Nvidia itself but by acquiring puts on the S&P 500 (SPY) instead. The alarm sounded with the market upheaval in early August and the subsequent spike in volatility, coupled with expectations around Federal Reserve interest rate decisions.
“We believe S&P put spreads offer superior shelter compared to NVDA-based hedges against this peril and its repercussions on the wider market,” remarked Asis. When the reasons behind this recommendation were unveiled, they proved compelling:
- Despite NVDA options hinting at a 10% swing during earnings, the stock hasn’t endured a drop exceeding 8% on reporting day since 2018
- The VIX 65 event on August 5 signaled the reemergence of market fragility, often leaving the S&P brittle post such seismic shocks
- S&P puts shield against macro factors like the impending release of U.S. August jobs and ISM PMI data, needing no dismal NVDA outcomes to pay dividends.
Affirming the rationale behind the recommendation, Asis highlighted that S&P options are a bargain when juxtaposed against NVDA options, bolstered by a comparative chart.
The $3.1 trillion-valued AI chipmaker is anticipated to announce a staggering leap to $0.64 in adjusted Q2 EPS, with revenue surpassing the $28.67 billion mark late Wednesday.
Underscoring its stature in the market, BofA emphasized Nvidia’s contribution of around 5 percentage points to the S&P 500’s returns this year. Furthermore, the stock’s reaction to earnings in the past six quarters has closely mirrored stock index performance.
Popular ETFs holding Nvidia include XLK, USD, SMH, and VCAR.