The savvy trader: Nvidia earnings countdown: 3 strategies to trade the volatility

Similarly, the volatility smile chart reveals elevated IV skew, particularly for out-of-the-money (OTM) puts, reflecting increased demand for downside hedges. OTM calls also exhibit higher IV, albeit less steep, suggesting moderate bullish speculation.

Calculating the expected move

To set realistic strike prices for pre-earnings trades, we calculate NVIDIA’s expected move using the ATM straddle price for the 22-Nov-2024 expiration:

• Stock price: $142.05
• ATM straddle price: $13.99
• ATM call (mid-price): $7.05
• ATM put (mid-price): $6.94
• Expected move (dollar): $13.60
• Expected move (percentage): ~9.58%

This means the market anticipates NVIDIA to trade between $128.45 and $155.65 post-earnings.

Important note: The expected move is a calculated indication based on current option prices. Actual price movements can exceed this range, especially if earnings results significantly surprise the market. It serves as a guideline for structuring options trades.

Visualizing the expected move

This visualization highlights the upper boundary ($155.65) and lower boundary ($128.45), providing a clearer context for setting strike prices in pre-earnings trades.

Pre-earnings trade setups

Using the expected move and volatility trends, we’ve designed three trade setups tailored to different market outlooks. Each strategy leverages NVIDIA’s unique IV dynamics to maximize potential profit while managing risk. Below, each strategy includes a detailed breakdown of the trade setup, the rationale, and key risks.

1. Bullish strategy: diagonal call spread

For traders expecting NVIDIA to rise moderately following its earnings, a bullish diagonal call spread offers a way to profit from small gains while limiting risk.

• Trade setup:
• Buy to open: January 17, 2025, $135 call
• Sell to open: November 22, 2024, $155 call
• Net debit: $1,575
• Max profit: $936.98
• Break-even: $142.09

This strategy benefits from the rising IV leading up to earnings, with maximum profit occurring if NVIDIA moves toward the short call strike of $155. If NVIDIA rises too quickly or doesn’t move enough, the profit potential is capped.

Rationale:

The goal of this strategy is to capitalize on the dynamics of rising implied volatility (IV) and time decay. Ahead of earnings, IV tends to increase, boosting the premium of the short-term call you are selling. By selling the November 22, 2024, $155 call, you take advantage of this elevated IV.

The front (short) call decays faster because it has less time until expiration, and you benefit from this faster decay while holding the longer-dated January 17, 2025, $135 call, which decays slower.

If NVIDIA rises moderately toward the $155 strike by November 22, you maximize profit because the short call loses value faster, and the long call retains potential upside. This reduces your cost basis since you’ve collected premium from the short call.

Risk:

The risk is limited to the net debit paid ($1,575). However, if the price rises far beyond $155, the short call caps your profit potential.

2. Neutral strategy: iron butterfly

For traders expecting NVIDIA to remain range-bound after earnings, a neutral iron butterfly captures elevated IV by selling options at the ATM strike and buying protective wings.

• Trade setup:
• Sell to open: November 22, 2024, $142 call and put
• Buy to open: November 22, 2024, $129 put and $155 call
• Net credit: $916.50
• Max profit: $916.50
• Break-even range: $132.84–$151.17

This strategy profits from the elevated IV leading into earnings and a sharp drop in IV after the report, as long as NVIDIA stays within the breakeven range.

Rationale:

The $142 short straddle captures the bulk of the premium from high IV. The $129 and $155 wings limit your risk by defining the range for maximum potential loss. Post-earnings, IV typically declines significantly, reducing the value of the short straddle and increasing the likelihood of capturing profit.

The strategy works best if NVIDIA remains near $142 by expiration on November 22, as this ensures maximum premium decay while avoiding significant losses.

Risk:

The strategy is at risk if NVIDIA moves sharply outside the breakeven range of $132.84–$151.17, as losses grow rapidly beyond these points.

3. Bearish strategy: diagonal put spread

For traders expecting NVIDIA to drop post-earnings, a bearish diagonal put spread provides a cost-effective way to profit from a downside move while managing risk.

• Trade setup:
• Buy to open: January 17, 2025, $155 put
• Sell to open: November 22, 2024, $135 put
• Net debit: $1,542.50
• Max profit: $821.12
• Break-even: $148.07

This strategy benefits from the IV skew in OTM puts, with maximum profit occurring if NVIDIA moves toward the $135 strike post-earnings. If the stock drops too quickly or remains above the short put strike, profit is capped.

Rationale:

The trade aims to take advantage of elevated IV in the short-term $135 put, which decays faster due to its shorter time to expiration. The long-term $155 put retains value as a hedge and captures further downside potential if NVIDIA falls sharply.

If NVIDIA drops toward the $135 strike by November 22, the short put loses value faster, leaving the long put positioned to profit from continued bearish momentum.

Risk:

The risk is limited to the net debit paid ($1,542.50). However, if NVIDIA fails to drop significantly or remains well above $148.07, the trade could result in a loss.

Final comparison

Diagonal call spread (Bullish)

• Net debit: $1,575
• Max profit: $936.98
• Max loss: $1,575
• Break-even: $142.09

Iron butterfly (Neutral)

• Net credit: $916.50
• Max profit: $916.50
• Max loss: $383.50
• Break-even range: $132.84–$151.17

Diagonal put spread (Bearish)

• Net debit: $1,542.50
• Max profit: $821.12
• Max loss: $1,542.50
• Break-even: $148.07

Key findings: The iron butterfly offers the lowest risk and highest probability of profit if NVIDIA stays range-bound, while the diagonal spreads (call or put) provide greater profit potential for directional moves but carry higher risk due to their debit cost. Choose your strategy based on your market outlook and risk tolerance.

Conclusion