Nvidia earnings report this week could impact fragile stock market

Nvidia's upcoming earnings report on Wednesday has raised concerns among investors, as Bank of America warns that the market may be overly optimistic. The report could trigger a sell-off in a stock market that has already shown signs of fragility following a recent downturn. Gonzalo Asis, a derivatives strategy analyst at BofA, suggests that investors should consider protective options trades to mitigate potential losses from disappointing earnings. He emphasizes that Nvidia's results significantly influence equity indices, making the risk of a negative surprise particularly impactful. Asis recommends a specific put spread on the SPDR S & P 500 ETF Trust (SPY) as a strategic move to hedge against this risk. Nvidia constitutes over 6% of the SPY, making it a crucial sentiment indicator for the broader market. The proposed trade involves buying a $555 strike put while selling a $545 strike put, effectively betting on a decline in SPY's value. This strategy aims to lower the upfront cost while still providing some protection against a market downturn. The SPY closed at $562.13 per share on Friday, meaning the $555 put option would be in the money with a minor decline. This situation mirrors the market's volatility observed on August 5, when the CBOE Volatility Index spiked, indicating a return to market fragility. Asis notes that the S&P has historically remained unstable following such volatility events. The put spread recommended by Bank of America expires on September 6, coinciding with the release of the jobs report and other economic indicators, further emphasizing the importance of this earnings report in shaping market sentiment and direction.