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Nvidia makes semiconductor chips used to power AI.
I-Hwa Cheng/Bloomberg
Artificial intelligence can destroy humanity, but not before creating enormous wealth. This is the paradox facing investors now after
Nvidia
It is
The recent earnings report has inadvertently created a large-scale ethical experiment on Wall Street.
On Tuesday, days after Nvidia (ticker: NVDA) surprised investors with a financial forecast that some say portends a new industrial revolution, artificial intelligence experts issued an ominous warning.
“Mitigation of the risk of AI extinction should be a global priority alongside other society-wide risks such as pandemics and nuclear war,” according to a statement released by the Center for AI Safety that was signed by many people in the field.
The warning has so far had little impact on investors.
Shares of Nvidia, which makes semiconductor chips used to power AI, continued to rise higher and higher. The excitement over AI is so intense that Nvidia’s extreme stock valuation is apparently of little concern. Some pundits and investors even credit the sudden emergence of AI with saving the broad market from worries of a potential recession, debt ceiling crisis, and other bearish hobgoblins.
How hot is Nvidia? Many investors are talking about stocks and AI, with a language rarely heard in typically stuffy financial circles. Susquehanna Financial Group semiconductor analyst Christopher Rolland told clients in a recent note that Nvidia’s earnings report was “an unfathomable beat as generative AI and accelerated computing flex. It looks like the new gold rush is upon us and Nvidia is selling out all the picks and shovels.
This year, Nvidia stock is up about 174%. The stock chart reveals extraordinary trading volumes and such bullish momentum that it’s as if the laws of gravity – and markets – don’t apply.
While such setups typically inspire bearish trading strategies that would benefit from a drop in stocks, Nvidia could be an exception to the rule. At least temporarily.
The main debate in the markets now revolves around how best to mine Nvidia shares besides owning them outright. Many investors choose to lease it in the options market. Call options, which increase in value as a stock’s price increases, cost a fraction of the stock’s price and offer investors a way to risk less money chasing after a hot stock.
Aggressive investors looking to take advantage of Nvidia’s surge might consider a “call spread,” which involves buying one call and selling another to take advantage of a rise in the stock price. The strategy is a favorite of many professional traders because the potential returns can be significant while the amount of money tied to the strategy is less than simply buying a call.
With Nvidia shares at $401.11, the July call at $415 could be bought for around $24 and the July call at $475 could be sold for around $8. The spread cost $16. If Nvidia is at $475 at expiration, the spread is worth a maximum profit of $60.
The return potential is attractive, but there is nothing certain about the strategy except tail risk. Any stock that has advanced as quickly and aggressively as Nvidia over the past week almost always succumbs to its own momentum. After a while, almost everyone who wants to buy the stock has done so, and there is little money left to drive the price up.
If Nvidia declines and trades below $415, the trade fails. To break even, the stock must reach at least $431. Over the past 52 weeks, Nvidia stock has ranged from $108.13 to $419.38.
Steven M. Sears is President and Chief Operating Officer of Options Solutions, a company specializing in asset management. Neither he nor the company has a position in the options or the underlying securities mentioned in this column.
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