As Nvidia reaches a new milestone, it’s still cheap to be greedy on another rally toward $5 trillion

Nvidia became the first member of the $4 trillion market cap club with a mammoth surge of over 70% off its early April lows. Even so, it’s still (optically) inexpensive to bet on a three-month rally that would take the stock to the precipice of the $5 trillion milestone.

One way to proxy how cheap or expensive options are is by examining their implied volatility. The higher the implied volatility, the more the price of the underlying security is expected to swing. Since buying options provides you with access to optionality, it costs more to seek 20% upside in something that’s expected to move a heck of a lot compared to a relatively calm security.

Which brings us to the implied volatility of 120% moneyness three-month call options on Nvidia — that is, calls with a strike price 20% above current prices — which are near their lowest levels on record since the AI boom unofficially became a Big Thing with the release of its earnings report in May 2023.

For instance, back on March 19, when the shares were trading at about $117.50, the $141 strike call option for the June 18 expiry was trading at $4.55. Today, with the shares above $163, the $195 strike call option for the October 17 expiry is trading at $4.10.

$0.45 might not seem like much, but remember, this is the options space. That’s $45 bucks a contract, or about a 10% discount to make a similar bet.

The implied volatility embedded in Nvidia options has gone down a lot simply because the realized volatility has gone down a lot, with trailing one-month realized volatility sinking from about 70% in mid-March to less than 30%.