JPMORGAN: Here's how to protect yourself in case Nvidia's earnings don't live up to the hype

Nvidia has had a monster start to 2017.
Shares are up 60% so far this year aided by a wave of enthusiasm in bitcoin and Ethereum.
The company makes graphic processing units (GPUs), which are used to power artificial intelligence and autonomous driving, in addition to speeding up the mining process for cryptocurrencies.

Nvidia is set to report its quarterly results after the close of trading Thursday.

Ahead of that report, JPMorgan’s equity derivatives strategy team, led by Shawn P. Quigg, warns the hype surrounding the stock has gone too far too fast.

The solution is to turn to the options market for some insurance against a report that doesn’t live up to expectations.

“We fear the mainstream hype surrounding NVDA’s high-performance computing businesses (i.e. artificial intelligence, deep learning, autonomous driving and cryptocurrency exposure) has set high expectations for its F2Q18 results, and 3Q guide,” the team wrote. “Because of the rally, shares of NVDA trade at 46.9x forward earnings, a five-year high. We find protection prudent.”

They believe investors who have been along for the ride should look to protect gains by taking advantage of “the cheap option implied earnings move.” Specifically, the team mentions buying the August 11th (weekly) 165 puts for $US4.85 as Nvidia has seen large moves on earnings in recent years.

Currently, the options market is predicting an implied earnings move of 8.3% in either direction, JPMorgan says. That’s a bit smaller than the average 10.9% move that has taken place around Nvidia earnings announcements over the past three years.

Wall Street is expecting Nvidia to earn $US0.82 a share on revenue of $US1.96 billion.

Get the latest Nvidia stock price here >>

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