Options Traders Line Up Hedges Before Pivotal Nvidia Earnings

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(Bloomberg) — Even before Friday’s slide jolted the US stock market out of its calm, some traders were preparing for unrest.

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While the S&P 500 Index was hovering near an all-time high and the Cboe Volatility Index was well below its five-year average, under the surface a more skeptical picture was shaping up — one that’s been already vindicated by the biggest selloff in two months. Last week, the ratio of outstanding VIX call options relative to puts neared its highest level since September 2023, with more than 1 million calls changing hands on Tuesday. 

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Investors have started to boost bets that volatility will come back as Nvidia Corp.’s earnings on Wednesday could be the first in a whirlwind of events with the potential to send the market into conniptions. While US President Donald Trump’s return to the White House and his tariffs rhetoric have so far done little to spook traders, warning calls have generally grown louder — from Nomura Holdings Inc.’s Charlie McElligott to Goldman Sachs Group Inc.’s Scott Rubner.

Read: Traders Piling Into VIX Call Hedges Raise Pressure on Dealers

“Nvidia certainly seems to have the chance to move the entire equity market,” said Brent Kochuba, founder of options platform SpotGamma. More broadly, “there are a lot of catalysts for volatility to spike over the next several weeks, including tariffs and the government shutdown deadline,” he added, saying that hedging activity picked up on Tuesday, when 250,000 VIX call options were bought in two block trades. 

Nvidia has more than tripled from a low in October 2023, becoming a $3.3 trillion behemoth, on optimism over the artificial intelligence sector. The rally has turned it into the second-biggest member of the S&P 500, making the broad market more vulnerable to the stock’s gyrations. 

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Since its last earnings report in November, trading in the shares has been choppy, and the January rout triggered by Chinese AI startup DeepSeek only added to the concerns. As of Friday, options traders were pricing in a 7.7% move in Nvidia shares following its earnings, compared with an average gain or drop of 9.2% after the last eight quarterly reports. The S&P 500 fluctuated an average 0.8% on those days, more than its mean daily move of 0.6% in the past two years. 

“Nvidia earnings and any subsequent volatility can definitely affect broader volatility,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “Any up or downside surprise in Nvidia earnings will have ripple effects to AI and AI-adjacent names.”

The chip giant is a late comer in the reporting season, with most S&P 500 companies having already posted results. The releases, which typically make stocks move more to their own tune and less to macroeconomic headlines, have helped push a gauge of realized correlation for the 50 largest S&P 500 members near 0, just shy of its lowest level ever. A reading of 1 implies the shares are moving in sync. 

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Throughout that period, hedge funds were betting just on market calm: Through Feb. 18, they were near the most net-short VIX futures in seven months, according to the latest available data from the Commodity Futures Trading Commission. The last time the reading was this low, the volatility shock of early August was about to happen. 

Beyond Nvidia, a host of catalysts could spur a resurgence of market swings in the coming weeks. The suspension of Trump’s new tariffs to Canada and Mexico is set to expire on March 4. Investors will get the latest read on the US jobs data three days later, and March 14 is the deadline to reach an agreement that would avoid a government shutdown. 

“If real impactful tariff news were to be negative across the board and stocks start to move in tandem or with high correlation, then we could certainly see a spike in volatility,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. 

—With assistance from David Marino.

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