NVDA – NVIDIA Corp. – The chip maker’s designation as a potential takeover target for software giant, Oracle Corp., sent NVDA’s shares higher and inspired one options player to position for significant bullish movement in the price of the underlying stock going forward. NVIDIA’s shares jumped 3.90% to an intraday high of $12.07 as of 12:15 pm ET, rallying on news that Oracle CEO, Larry Ellison, said the company will be “buying chip companies” during its annual meeting on Thursday. It looks like the investor employed roughly 70,000 call options in order to take a long-term bullish stance on NVIDIA Corp. The options strategist essentially initiated two large-volume calendar spreads, buying the nearer-term contracts and selling the longer-dated ones. He purchased approximately 17,800 calls at the January 2011 $14 strike for a premium of $0.51 each, and picked up another 15,400 calls at the March 2011 $15 strike at a premium of $0.53 apiece. The long call positions were matched against the sale of nearly identical amount of calls at two January 2012 strikes: $20 and $22.5. The sale of options with a greater shelf-life helped reduce the net premium paid by the investor to approximately $0.16 per contract. The trader is therefore happy to buy NVDA shares at $14.00 each and $15.00 each if the calls land in-the-money by the time the contracts expire. He is also willing to then have those shares called from him at $20.00 and $22.50 should shares exceed those values by expiration day in January 2012. If successful, the two strategies could bag maximum net profits of up to $8.34 on one spread and $5.00 per contract on the other in the event of a surge in Nvidia’s share price. The strategy appears to rest upon the assumption that the company would become a victim of a takeover battle. For the upper strike price to be breached would require a surge of 86.4% in Nvidia’s shares from today’s current price. The potential risk of loss facing the investor is certainly substantial in a strategy such as this one. If NVDA’s shares fail to rally above $14.00 by Jan. 2011 expiration, and do not exceed $15.00 by Mar. 2011 expiration, those options will expire worthless, but the investor will still be on the hook to deliver roughly 3,300,000 shares at $20.00/$22.50 if the calls of which he is short ultimately land in-the-money by January 2012 expiration day.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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