Nvidia’s Q2 results may disappoint, and here’s how to hedge against the risk: BofA

Financial institution of America (BofA) urged a option to hedge in opposition to the chance of a possible miss by Nvidia (NASDAQ:NVDA) when the world’s second-most priceless firm releases its Q2 report this week.

Buyers “could also be underpricing the chance of disappointment,” and the “extra enticing” avenue to hedge that threat is to purchase places on the S&P 500 (SP500)(SPY) than on Nvidia (NVDA) itself, Gonzalo Asis, vp of BofA’s fairness derivatives analysis crew, mentioned in a Sunday word. BofA noticed the chance emerge with the early-August market selloff and volatility explosion (VIX), and with traders now keying in on upcoming rate of interest cuts by the Federal Reserve.

“We predict S&P put spreads provide higher safety than NVDA-based hedges in opposition to this threat and its influence on the broader market (e.g. SPY 6-Sep 555-545 put spreads for over 5x max payout),” Asis mentioned, and supplied a couple of causes:

NVDA choices indicate a ten% transfer round earnings, however the inventory hasn’t offered off greater than 8% on the day of reporting since 2018 The VIX (VIX) 65 episode of 5-Aug highlights the return of fragility for the broader fairness market, and the S&P (SP500) has typically remained fragile after such giant shocks S&P places provide safety from macro drivers akin to subsequent week’s launch of the U.S. August jobs and ISM PMI stories, and traders “don’t want poor NVDA outcomes to repay.” S&P choices are “low cost” relative to NVDA choices, Asis mentioned, and printed this chart:

The $3.1T valued AI chipmaker (NVDA) is predicted late Wednesday to submit a surge to $0.64 in adjusted Q2 EPS on income that greater than doubled to $28.67B.

Underscoring its market affect, BofA mentioned Nvidia (NVDA) has added ~5ppts to the S&P 500’s (SP500) returns this yr, and response to its earnings stories over the previous six quarters have been extremely correlated with the efficiency of inventory indexes (SP500)(COMP:IND).

ETFs that maintain Nvidia embody (XLK), (USD), (SMH), and (VCAR).