Wednesday night, NVIDIA surprised investors with an unexpected warning — up to $400M in sales would be lost this quarter. This was due to the new licensing requirements between the U.S. and China, which will require (NVDA) to get a special government license before it can sell certain cutting-edge semiconductors to China. The same regulations will affect its competitor in high-tech chips, Advanced Micro Devices (AMD). As a result, both stocks are currently down 11.6% and 6.96% respectively.
The Broader Picture: Technical Weakness in NVIDIA
Market Rebellion’s Chief Technical Analyst AJ Monte called out the weak technical picture in NVIDIA on August 3rd, with the stock trading at $185.65. Below is a chart from AJ Monte’s Oracle Essential, depicting NVIDIA as it approaches an area of resistance.
For the uninitiated, this may look like a bunch of lines. But for a skilled technical analyst, this is a roadmap where all signs are pointing lower. AJ noted following bearish signals in NVIDIA:
- Descending volume: Low volume is a sign of investor indecision, or a lack of conviction in the current trend direction of a stock. When you see consistently lower volume, that means “Proceed with caution”.
- Stale green light: Six green candles in a row. It’s a sign that a stock is getting overbought, and it hadn’t happened in NVIDIA all year prior to this event.
- Stochastics crossing: Stochastics are a momentum indicator. While momentum was previously bullish (blue line over red line), momentum was crossing over to bearish, another overbought signal.
- Negative divergence: Despite the stock making a higher high between 7/20 and 8/03, the stochastic indicator and the CCI indicator fell — this negative divergence is a bearish signal.
- Spinning top following a shooting star: Single-candle reversal patterns like shooting stars, spinning tops, doji’s and more all represent a potential change in trend. They’re even more reliable when they happen directly following one another.
With this in mind, AJ issued a bearish trade idea in NVIDIA to members of Market Rebellion’s Oracle Essential service:
With the stock trading at $185.65, AJ went out 43 days to the September 16th expiration and bought the $160 puts for $4.80 a piece.
Get access to AJ’s next trade idea, with Oracle Essential. Harness the power of technical analysis with help from a licensed CMT. Get two actionable alerts delivered to your inbox every week, each with a video breakdown of the charts from AJ Monte himself.
At the time of writing, those put options are worth $30.40, and NVIDIA has declined by more than 28% from the original trade price.
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But AJ Monte wasn’t the only one buying puts on NVDA…
Institutions Load the Boat: Unusual Options Activity in NVIDIA and AMD Puts
On August 26th, Market Rebellion discovered multiple massive bearish trades made in NVIDIA and (AMD) puts.
The first two trades (11,400 $80-strike AMD puts and 12,000 NVDA 165-strike puts) were made just two minutes apart, and featured similar contract quantities — meaning it was extremely likely that this was the same trader making both of these moves.
The AMD $80-strike puts cost the bearish trader $5.23M, and those NVDA puts (which were set to expire only one week after the purchase) cost the buyer $2.14M. Combined, these two option purchases accounted for 23,400 contracts — all OTM. But the trader wasn’t done. They came back just four days later — only one and a half days before the news broke — and spent another $1.57M on out-of-the-money AMD puts, this time with only three days to expiration. All together, these three purchases amounted to $8.94M — 38,400 short-dated, out-of-the-money puts contracts.
How Those Three Bearish UOA Trades Performed
In third place: The December AMD trade. 11,400 put options (initially bought for $5.23M, $4.58 average per contract), are now worth $9.50 per contract — a sum total of $10.83M, more than double the initial trade price.
In second place: The August 30th, three-day-to-expiration AMD trade. 15,000 put options (initially bought for $1.57M, $1.05 average per contract), now worth $6.35 per contract — a sum total of $9.53M, more than six times the initial trade price.
In first place: The August 26th, NVIDIA put-weekly trade. 12,000 put options (initially bought for $2.14M, $1.78 average per contract), are now worth a whopping $30.40 per contract — a sum total of $36.48M, more than seventeen times the initial trade price.
The Bottom Line
There’s blood in the streets right now. Many investors are running scared, or simply white-knuckling it through the market’s twists and turns. But some institutional traders, like this one, have managed to stay one step ahead. Through the power of put options, they found a way to profit off the stock market’s pain.
Whether that institutional trader saw the same bearish technical forecast that CMT AJ Monte saw in NVIDIA, or they knew something ahead of the press release, it doesn’t matter. What does matter is that the trade worked — and it’s another great example of why individual traders should consider trading on unusual options activity.
Source: https://www.thestreet.com/investing/options/bears-feast-on-nvda-12000-puts-bought-directly-before-big-news?puc=yahoo&cm_ven=YAHOO&yptr=yahoo