S&P 500 INDEX (SPX), Trending Stock Report

You probably know that we like to do credit spreads on the S&P 500 INDEX (SPX). In fact, Don made a 19% gain on an SPX credit spread yesterday. He was looking at trying another credit spread on SPX today.

While evaluating credit spreads, you have to consider events that are on the calendar. One of those events is NVDA’s earnings release, which is due after the close tomorrow. Don wanted to see how SPX has performed on the day before NVDA earnings.

What he found was very interesting. Even when NVDA, an SPX constituent, was going through the roof in a spectacular way, SPX during that same period has not done so well the day before NVDA reports. In fact, it’s tended to move down more than 0.5% much more frequently than you might expect.

Although the exchanges and brokerage firms don’t like to admit it, option trading is pretty similar to betting on an NFL game. In this case, imagine the Kansas City Chiefs playing the Chicago Bears. You know there is going to be a big point spread. But how big? If the spread is 150, you know the spread is mispriced.

That’s kind of what we have here. When Don checked to see how SPX did the day before NVDA earnings, he found that credit spreads on SPX are not a good idea, but debit spreads sure are. He looked back at the rocket ship that took NVDA to the moon. If you bought $1,000 worth of shares of NVDA back in 2015, you would have over $252,000 today. What was unexpected was that, despite the fantastic performance of NVDA over that time period, the S&P 500 performed surprisingly bad the day before earnings were reported.

For example, there is one put debit spread where you risk $90 to make $410. And if the probabilities hold up, the win rate is 30%. Do the math -$90 risk times 7 = -$630, +$410 profit times 3 = $1,230. Add them together and it’s a nice profit.

NVDA’s upcoming earnings report has everyone talking about what to expect. That’s what prompted us to take a look. We just look at things a little differently, with an options trader’s perspective, to find potential advantages. With that in mind, we like the idea of trading SPX options using a debit spread to take advantage of an apparent anomaly in SPX options on the day before NVDA earnings.

To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.