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Nvidia options underpricing rising earnings fragility

In a note to clients Tuesday, Bank of America highlighted a potential undervaluation in Nvidia (NASDAQ:NVDA) options pricing despite rising concerns about earnings fragility in the broader big-cap tech sector.

While the market anticipates an implied move of only 8.6% for NVDA's upcoming earnings release, BofA says this is lower than three out of the last five earnings events.

According to the bank, this disconnect suggests that options are underpricing the potential for a larger stock price movement.

BofA "continues to favor using optionality to asymmetrically position for a potentially favorable earnings reaction."

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The analysts also suggest using options on other stocks or ETFs sensitive to the chipmaker's performance.

They point to Microsoft (NASDAQ:MSFT), Advanced Micro Devices (NASDAQ:AMD), the Technology Select Sector SPDR Fund (XLK), and the Semiconductor Manufacturing and Equipment Holding Fund (SMH) as potential beneficiaries of an Nvidia rally.

Options on these underlying assets are viewed as offering cheap upside potential compared to their historical price movements in response to Nvidia's earnings.

In a slight contrast to BofA, Piper Sandler said in a note Monday that they believe Nvidia's near-term options appear slightly overpriced but not excessively so.

The firm's analysis suggests that while Nvidia options are generally fairly priced, there is a slight overvaluation of upside potential.

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