Abstract:
Professionals from Macro Risk Advisors (MRA) discovered an unusual operation: on October 12, someone established a series of significantly out-of-value put option positions on Nvidia stock that will expire in January next year. Specifically, MRA's Joseph Niles said the mystery trader bought 180,000 puts with a $150 strike price and sold 280,000 puts with a $100 strike price. The initial cost of the deal is approximately $8 million.
However, Nvidia shares have fallen sharply since October. According to MRA's calculations, the deal has now generated a profit of approximately US$196 million, equivalent to approximately 24 times the initial royalty payment.
A put option is a type of financial derivatives contract called an option. Call Options give the holder the right, but not the obligation, to buy the underlying security at a predetermined price before the contract expires; Put Options give the holder the right to sell the underlying security at a predetermined price. Because buying options only requires an upfront premium, it can be a way to make a highly leveraged bet that a stock will rise (call options) or fall (put options).
In this transaction, the mysterious trader bought a put option with an exercise price of $150, while Nvidia’s stock price was $226 on October 12. At the same time, he partially funded the trade by selling a larger batch of puts with a strike price of $100.
He paid the premium for the first tranche of options and received the premium by selling the second tranche of options. The net cost of the transaction is estimated at $8.32 million.
Both of these put option trades were significantly "out of the money" options. In other words, at the time, it seemed unlikely that Nvidia's stock price would fall to such a low level before the expiration in January next year. Therefore, buying a put option with a strike price of $150 is relatively cheap, and selling a put option with a strike price of $100 further recoups some of the cost.
In other words, if Nvidia's stock price starts to fall and gradually approaches $150, the mysterious trader can make a huge profit.
But if the stock price continues to fall towards $100, he may face a huge loss because he needs to bear the obligations arising from the put option he sold with an exercise price of $100.
Currently, Nvidia’s stock price is about $166, which is in the most favorable range for this transaction.
In any case, the maximum profit that can be obtained from this transaction is approximately US$892 million.
But if Nvidia’s stock price falls sharply below $100, the deal could theoretically suffer a loss. The reason is that a trader's loss from selling a put option with a strike price of $100 will exceed the gain from buying a put option with a strike price of $150.
However, MRA's Niles calculates that the deal will be profitable as long as Nvidia's stock price remains between $11.46 and $150.46 by the time the option expires on January 15, 2027.
Of course, the individual or institution that originally established the position can also, and probably should, sell the contract before the option expires to lock in profits in advance.
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