Nvidia earnings report imminent, options market raises alarm! Will another round of "sell the news" dumping occur?

The options market is sending investors a warning: before NVIDIA releases its earnings report, the market may soon become even more volatile.

The Nasdaq Composite Index recorded its first two consecutive days of pullbacks since March on Monday (May 18), ending the previous round of epic rallies. Leading semiconductor stocks took a hit, while previously underperforming software stocks had a brief moment in the spotlight.

According to FactSet data, both the S&P 500 and the Nasdaq Composite declined for the second straight session on Monday. For the Nasdaq, this marked the first two-day drop since March.

SpotGamma founder Brent Kochuba believes the market could see a steeper correction as investors await NVIDIA’s earnings report after Wednesday’s close. NVIDIA’s earnings have always been considered a major market-moving event.

Additionally, according to recent comments Kochuba shared with subscribers and MarketWatch, he believes NVIDIA’s report could be a turning point for this tense market if investors betting on NVIDIA’s upside unwind large bullish options positions.

Kochuba and others have noted that the Cboe Volatility Index—commonly known as the “VIX,” or Wall Street’s “fear gauge”—has been rising for several weeks even as the S&P 500 has been setting new record highs. This dynamic doesn’t always occur.

(Source: FactSet)

Kochuba told MarketWatch that this relationship could indicate investors are preparing for a market pullback. This dynamic isn’t limited to the S&P 500. The same pattern is evident in three major ETFs and several leading stocks.

(Source: SpotGamma; as of close on May 14)

The table above shows at-the-money implied volatility—usually expressed as a positive value—and implied volatility percentiles. The latter helps provide context, showing how elevated that value is compared to its lookback period.

Kochuba stated that, typically, for a given instrument, implied volatility is inversely related to spot price. He wrote: “When both rise together, it may mean traders are chasing the upside while paying a higher cost for protection—suggesting the market is preparing for expanded volatility.”

Beyond activity in the options market, investors also have reason to be nervous about NVIDIA’s report. It will be one of the last major releases in what has been a strong earnings season. Many on Wall Street, including analysts at Bespoke Investment Group, said Walmart’s earnings on Thursday will unofficially mark the end of this robust quarterly performance period.

After that, it may become difficult for investors to find further positive catalysts. Especially with the situation in the Strait of Hormuz unresolved and global bond yields continuing to rise. B. Riley Wealth chief market strategist Art Hogan said that, in other words, NVIDIA’s report on Wednesday could trigger a round of “sell the news” selling, similar to what investors saw previously.

Hogan told MarketWatch in an interview Monday: “During earnings season, investors tend to shift their focus from macro to micro, meaning towards individual company reports. At the same time, they ignore many macro factors that drove markets before earnings season began.”

He added: “Investors have been turning a blind eye to inflation risks and ignoring signals from the U.S. Treasury yield curve. Yields have broken above 4.5% and remain on an upward trajectory.”

Rising bond yields appear set to fuel more volatility, much like what investors saw last Friday and this Monday.

Hogan added: “That’s exactly what happened last Friday. The harsh facts of the real world are starting to sink in for markets: inflation remains stubbornly high.”