Few people would dispute the fact that Nvidia Corp. (NASDAQ: NVDA) has captivated Wall Street this year with GPU chips that are some of the most coveted in the industry. Nvidia saw an incredible stock run to over a 1,200 and subsequent 10-for-1 stock split. Even post split, Nvidia has a roughly 5 point intraday trading range, and had a nine trading day run as recently as from August 9-19, from $104.75 to $130.00, a 25.25 point gain.

In order to take advantage of this recent surge, 100 shares of NVDA would have cost $10,475. The gross profit would have been $2,525, a roughly 24% ROI. Alternatively, a single August 104 Nvidia call option would have cost about $900 on August 9th, and could have been sold for $2,500 on August 19th. That equates to a 277.7% ROI, before fees. Sounds too good to be true? It’s not – but the tradeoffs are exponentially increased risk to capital, more extreme volatility, and execution speed, among other things.

“Easy to Learn, Difficult to Master”

The world of option trading can be analogous to many disciplines and platforms. The axiom, “Easy to Learn, Difficult to Master” has been conferred for over a century to Wing Chun kung-fu (best known as Bruce Lee’s foundational martial art), due to its simple and direct techniques. But its applications are broad, deep, and can be very complex. This is also true of options. 

Options can be used on both the long and short side, with variations and hedging strategies also adding complexity to their applications. They are routinely used by professional traders and institutions for commodities futures, forex, interest rate swaps, indexes, bonds, and equities, to name a few. This article will serve as an introduction, and will focus on the equity call option side, leaving put options and other strategies for future articles. The real life example to be referenced will be August 2024 Nvidia options, which have now expired, so prices are historical.

Trading Nvidia Calls – A Real Life Example

Using the above example, here is an illustration of three scenarios that likely occurred for investors who traded Nvidia options in August with strike prices with a few points of the underlying stock’s market price.

At-The Money- refers to when the call option strike price is at the price of the underlying stock. For example, when Nvidia stock was at 110, the August 110 call would be considered at-the-money.

• On August 9, the Nvidia August $104.00 calls traded intraday between $8.35 and $10.05 with a total volume of 907. 
• That same day, NVDA stock traded between $103.43 and $106.60. 
• The time value and intrinsic volatility at the time, with 14 days remaining in August before expiration, was roughly worth 8 . Once the Nvidia August 104 call became “in-the-money” as the stock rose above 104.00, its intrinsic value increased point-for-point with the stock.
• The option premium, now reflecting the $2.60 intrinsic value, which is $2.60 + 8, is worth $10.05 when the stock is at $106.60 .
• By August 13, NVDA closed at $116.43. The Nvidia August $104 call closed at $15.56. The Intrinsic value is 12 ($116.43-$104). The time value has eroded by a week, so the remaining premium of time value and volatility is now reduced to 3.56.
• On August 19th, with 1 day to go before expiration Friday, NVDA stock closed at $130. The Nvidia August 140 calls traded between $21.70 and closed at $26.90. With intrinsic value at 26 (130-104), the premium volatility and time value now shrank to $.90. 

Unless there was news that made it worth the risk to wait until expiration day, selling the day before is a prudent strategy, especially if a large gain has already been attained. With near zero time value remaining, the other concern is if a sell order is not executed. An in-the-money call will automatically be executed, so unless the account has sufficient funds, the exercise process may margin your other securities without prior client permission to pay for the shares. Closing out all open positions before expiration is a wise general rule of thumb, unless there is a plan to acquire the actual stock.

In-the-Money- refers to when the call option strike price is below the price of the underlying stock. For example, when Nvidia stock was at $113, the August $110 call would be considered 3 points in-the-money.

Since In-the-Money calls mostly have intrinsic value and move point for point with the underlying stock, there is usually much less interest.

• On August 9th, the Nvidia August 100 calls were $10.83, reflecting a time and volatility value of $6.08 with the stock at $104.75.
• On August 19th, the Nvidia August 100 calls were $30.74 when the stock was $130. The premium of time value had basically disappeared, with $0.75 of volatility value left. 

Out-Of-The Money- refers to when the call option strike price is above the price of the underlying stock. For example, when Nvidia stock was at $113, the August $115 call would be considered out-of-the-money.

As the premiums of out-of-the-money calls have zero intrinsic value, these options are the most speculative. The majority of out-of-the money options that do not go into-the-money by expiration week expire worthless on expiration day. 

• On August 9th, the Nvidia August $133 calls were $1.06 and traded over 300 contracts, despite being (28+) points out-of-the-money with the stock at $104.75.
• By August 13th, the Nvidia August $133 calls were $2.71, with volume of 273, when the stock was $116.43. ($16.57) out of the money, but Nvidia’s volatility factor still attracted speculation.
• On August 19th, the Nvidia August $133 calls were $7 when the stock was $130. They expired worthless at 4:00pm EDT, but the volatility premium increased as the stock approached the $133 strike price.

Options are not for everyone. It is important to understand the risks involved – especially since options are a decaying asset. While the amount of capital put at risk with options is smaller than the actual stock, the chances of losing the entire amount if the options expire worthless are exponentially higher. 

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