When it comes to Nvidia Corp. (NVDA), the bulls were out in full force on Monday as usual. The shares have skyrocketed 17-fold in five years and were up more than 2 percent to at least $185 in daily trading. Now, the latest issue of Barron's is offering investors a new, exotic way to profit off Nvidia: by purchasing call options as a good way to play the stock's rise to $200. 

This optimism may be unjustified, according to a detailed analysis of options trades, which indicate that Nvidia's shares could fall as much as 12 percent as it enters a period of risky volatility for investors.

Huge Implied Volatility

The big problem: these $180 call options are trading at a significant premium due to the astronomically high implied volatility of Nvidia's shares. That implied volatility is nearly 6 times more expensive than the S&P 500, which has an implied volatility of 7 percent. This means there is a very real risk that Nvidia's shares could plunge below $164 a share, as explained further below.

The Nvidia November call options are trading with an implied volatility of 42 percent, which is 16 percentage points higher than high-flying Amazon, and 2 percentage points higher than even Netflix. The options market is pricing in significant levels of volatility, using the at-the-money $185 long straddle set to expire on November 17. The options strategy, which involved buying both a put and call, is pricing in nearly a 12 percent move up or down in the stock by expiration. This means the shares would have to trade below $163.50 or above $206.40 to be profitable, as indicated by options trades.

An earlier story this week looks at the challenges facing Nvidia from a technical and fundamental perspective. (See also: Nvidia Rally Is One Step Closer to Exhaustion.)

Traders Playing Volatility

(Interactive Brokers)

With nearly 8,500 contracts of open interest on the $185 calls and 7,000 contracts of open interest in the $185 puts, it suggests that traders with a bullish or bearish outlook are basically split. Perhaps more important, it tells us that traders are merely playing volatility in this stock, looking for Nvidia's shares to have a big move either up or down over the next month. Options pricing is derived from time value and intrinsic value. The value of the options is expensive because the intrinsic value is being lifted by high levels of implied volatility. 

Bearish Trading Patterns

 

 

The trading patterns look especially bearish for the stock over the longer-term. As noted in previous Investopedia stories, the stock is currently in a rising wedge formation, which is a bearish technical pattern, and could symbolize a decline ahead. Additionally, volume has been declining for the stock on its most recent move higher, which also suggests that buyers are not as numerous in the past. 

 

 

The stock continues to trade with lots of volatility, and the options market is pricing in even more volatility in the coming weeks. Which way the stock will move from current levels is the prominent question. However, declining volume could suggest the bulls are getting tired. That, coupled with rising expectations of volatility, suggests that Nvidia's shares could be set for a fall. 

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