Quiver Quantitative - Nvidia (NASDAQ:NVDA) (NVDA) is experiencing a rally reminiscent of meme stocks, driven largely by a surge in call option trading. On Tuesday, call option trading for Nvidia hit the fourth-highest notional level, with shares trading at a record high of over $1,100. This significant trading activity, nearly double the 20-day average, occurred outside of an earnings report, highlighting the market's intense focus on the artificial intelligence leader. The trading frenzy contributed to a gamma squeeze, amplifying the stock market gains.
Thousands of near-worthless call options set to expire at the end of the week saw a sudden 1000% increase when Nvidia's shares opened sharply higher. This surge forced option dealer desks, which had sold these contracts, to buy more shares to hedge their positions. This buying activity created a feedback loop, driving shares even higher and bringing more options into the money, further necessitating additional share purchases by dealers.
Market Overview:
- Spike in near-expiry call options triggers a "gamma squeeze" fueling the rally.
- Call option volume surges to record levels, exceeding historical averages.
- Expiring call options rally dramatically, forcing option dealers to buy shares and hedge positions.
- Similarities observed to Tesla (NASDAQ:TSLA)'s 2021 rally, potentially fueled by "meme stock" dynamics.
- Market assesses the sustainability of the current rally fueled by options activity.
- Focus on whether fundamentals can justify Nvidia's record valuation.
- Potential for volatility as expiring options contracts roll over.
The price movements of Nvidia's stock echo the late 2021 rally of Tesla (TSLA), where similar market mechanics drove shares to parabolic heights. Interestingly, Elon Musk has played a part in Nvidia's recent surge as well, as his intensified competition with OpenAI fueled the latest artificial intelligence craze. The post-earnings rally has significantly boosted Nvidia’s market capitalization, adding approximately $470 billion.
This surge in Nvidia's stock underscores the powerful impact of short-dated call options on stock prices, particularly for companies at the forefront of cutting-edge technology. As Nvidia continues to benefit from the AI boom, its stock movements will likely remain a focal point for investors and traders alike.
This article was originally published on Quiver Quantitative