Investors’ fervor for all things AI-related is leaving its mark on the U.S. options market, as traders pile in to derivatives bets to gain exposure to the red-hot investing theme.
Options on artificial-intelligence darling Nvidia (NVDA-Q) accounted for 25 cents of every dollar of premium - the price of contracts - traded in U.S. single-stock options over the past month, nearly $3 billion in options premium traded in the chipmaker’s options every day on average, a Reuters analysis of Trade Alert data showed. During several recent sessions, Nvidia surpassed Tesla (TSLA-Q) as the option market’s most heavily traded name for the day.
Nvidia briefly hit $2 trillion in market value for the first time on Friday - two days after it released quarterly earnings - riding on insatiable demand for its chips which feature prominently in the generative AI craze.
Nvidia recently became the third-largest U.S.-listed company as measured in market capitalization. Its shares command a weighting of 4.5% in the S&P 500, giving them an outsized influence on the broader index’s moves.
Nvidia’s options should remain popular with traders, “both from a hype and mechanical index perspective,” said Garrett DeSimone, head of quantitative research at OptionMetrics. “It represents such a large portion of S&P 500 weighting.”
The stock’s options have drawn a range of bets, including ones guarding against a drop in the stock toward $350 by March and others that would bear fruit if the stock extended its meteoric rise toward $900 and higher in coming months.
Nvidia shares were up 1.4% at $798.90 on Monday afternoon.
A host of other AI names has also drawn heavy options volume, including Super Micro Computer and Arm Holdings . Nvidia’s shares are up about 60% year-to-date, while those of Super Micro Computer have risen 200% and Arm’s have gained 77%.
Nvidia is not the first company to captivate options players. Derivatives bets on electric-vehicle manufacturer Tesla accounted for around half of all equity, index and ETF options premium in October 2021, as the company’s shares soared. Tesla’s options remain a crowd-puller that still often feature on the list of any given day’s most actively traded options.
Though the frantic pace of trading in Nvidia’s options could ease now that its earnings report is in the rearview mirror, market participants said the AI theme was likely to remain popular among investors.
Some of the future demand for Nvidia’s options is likely to come from investors who may have missed the wild rally in the stock.
“There are undoubtedly institutions that may not want to chase an already highly appreciated stock but don’t want to miss out on the rally,” said Steve Sosnick, chief strategist at Interactive Brokers.
Buying options would “allow them to get leveraged exposure to Nvidia’s upside but with a defined cash outlay,” he said.
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