- ASML 1M ATM IV at 2YPc14, attractive to capitalise on upside risks should NVIDIA results beat expectations.
- Has lagged the broader Tech sector rebound since the mid-April sell off, trading 10% below its all-time high.
- Undemanding valuation at 37.5x PE, a 22% discount to its peak rating of 48.3x.
As per our 20 May weekly note All Eyes on NVIDIA... again the market’s attention will be focused on Nvidia's 1Q24 earnings on Wednesday 22 May, given the majority of earnings in the US and Europe are out of the way. NVIDIAs 1Q23 results marked the beginning of the AI frenzy, as a 19% EPS beat added nearly USD300bn in AI stocks market cap in a single day and 20% to NVIDIA, which has now tripled in value in a year. The implied 1D move is currently at 9%, which is not a major premium to the average earnings move of 8.5%, though regardless it remains of particular interest given the size of the implied move in absolute dollar terms. In the options space the skew is inverted for the one-week tenor, with the largest open interest on USD1,000 strike calls (+8%).
ASML, the only relevant AI play in Europe has been trading in a 5% range over the last month, and has been lagging the run up of the broader Tech sector following the market rebound from the mid-April sell off. The SOX, NVIDIA and TSM are all trading at peak or above all-time high prices while ASML is currently at a 10% discount to its March peak. In terms of valuation, both NVIDIA and ASML are trading at PEs of 35x and 38x respectively and at significant discounts to their peak ratings which we believe is supportive of further short-term upside.
In line with our broader short-term macro view, we see upside risks following last Friday’s expiration, which is estimated to have removed USD4bn in dealer gamma, from c.USD7bn before expiration and with spot SP500 prices slowly grinding up close to the estimated 5300-5400 dealer short gamma levels. A NVIDIA beat could be the catalyst for a further broader market melt up, pushing QQQ to the upper bound of its rising diagonal.
In terms of volatility, ASML 1M ATM IV is very attractive at a 2YPC14, both in absolute terms and relative to NVIDIA, with a 1M ATM IV at 2YPC57 (1YPc72) reinforcing our view of buying calls on the stock as a means of capitalising on a reignition of the broader AI narrative. We propose buying June 24 920 calls at a net cost of 0.8% of underlying (spot ref: 851). Should the spot price increase by 8% to its local resistance level of EUR920, the value of the strategy would return c.7x on the premium employed, all other parameters remaining equal.