NDX Option Price Behavior Around NVDA Earnings: A Surprising Divergence

NVIDIA (NVDA) is an absolute beast of a company that dominates the headlines on a regular basis. It also is influential for Nasdaq-100 (NDX) performance as the largest component at just under 9% of the index. NVDA also stands out from other large NDX components by reporting their earnings during a traditionally light week for corporate earnings. The benefit of NVDA reporting ‘alone’ is that we can analyze how NDX and NDX option pricing behaves around NVDA earnings. Before jumping into NDX reactions we will look at earnings reactions for NVDA over the past three years.

The graphic below shows the 1-day change for NVDA in reaction to their earnings announcement. The average price change is +/-8.29% with a wide range of outlier moves, mostly to the upside (see Q423, Q124, and Q424 below).

Data Sources: Bloomberg & Author Calculations

The second graphic shows the nearest dated at-the-money (ATM) straddle pricing before and after NVDA reports earnings. Note that NVDA split 10 for 1 recently so all the option pricing observations, except the most recent one, have been split adjusted. All twelve observations below use options expiring on Friday, or two trading days after NVDA reports earnings Wednesday after the close. This is an important point to remember when we look at NDX price activity.

Despite several outlier moves, sellers of NVDA straddles would profit 58.33% of observations and the net profit is 1.59. Considering there are some observations substantial losses, this is a bit of a surprise.

Data Sources: Bloomberg & Author Calculations

When we turn to NDX, the price changes are not as dramatic as NVDA’s, but there are some big moves in both directions on NVDA earnings day. The average price change for NDX on NVDA earnings reaction day is +/-1.53% which is 40 basis points higher than the average NDX price change over all days during the same 3 year period of +/-1.13%.

Data Sources: Bloomberg & Author Calculations

As mentioned above, we used 2-day options for NVDA, so we are using the same tenor in NDX options. There are two reasons for this, there were no NDX options expiring on Thursday for the first three observations below and by using 2-day options we get a better NVDA vs. NDX performance comparison.

Data Sources: Bloomberg & Author Calculations

The net result for a consistent NDX 2-day ATM straddle seller who exits on the close on Thursday is a loss of over 168 points. Also, NDX straddles overpriced the subsequent move on 41.67% of earnings days, less than NVDA.

The table below summarizes the information for both NVDA and NDX price reactions and option pricing around NVDA earnings.

Data Sources: Bloomberg & Author Calculations

This leaves us with a head scratcher and a lot to dig into. If long NDX straddles work (oppositive of the table above) and short NVDA straddles have profited over time, there are unlimited methods of taking advantage of this divergence. We will be looking at both the NDX and NVDA options chains to see what’s expected as far as price reactions go and if there’s an opportunity to trade NDX, NVDA, or possibly both together.