Volatility Shift With Nvidia Taking the Spotlight

Tech giant Nvidia has officially become a volatility player. Most recently, its 30-day implied volatility crossed above that of bitcoin and ether, two of the largest cryptocurrencies. This shift in volatility is rather intriguing, and I think it might be very useful to look into the drivers behind this change.

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I would proceed on the premise that the increased importance of Nvidia within the AI domain over the recent past has established it as a harbinger of much in the tech sector. Its stock performance has been closely linked with sentiment in both the equity and crypto markets since the advent of ChatGPT toward late 2022. Owing to this correlation, which is more than mere chance, I feel that both, Nvidia and Bitcoin especially have been driven helter-skelter by very similar macroeconomic drivers.

It means that, while Nvidia's implied volatility moved up from 48% to 71%, bitcoin's volatility dropped from 68% to 49%. This parabolic hike in Nvidia's volatility is attributed to hedging activity by market makers, a very common trend in the crypto market. I think this foreshadows investor skepticism toward Nvidia stock, which has been volatile since reaching $140 last month.

Worth noting here, the Nvidia share price has moved in close association with the cryptocurrency market, specifically bitcoin. The two seem to have a very high correlation, as can be shown by the 90-day correlation coefficient of 0.73. That would mean that investors are positioning Nvidia as a de facto proxy for the crypto market and that its share price performance is driving sentiment.

Looking back at this volatility shift, I believe one has to take a step back and look at the general market. The decline of Nvidia's stock has presented bearish cues for the crypto market since bitcoin has been stuck within the range of $60,000 – $70,000. This is a clear indication that investors have shied away from risk, and in my view, the crypto market will remain very volatile in the near future.

The role of market makers in fueling volatility cannot be understated. As Griffin Ardern, head of options trading and research at BloFin, has suggested, negative gamma hedging played a big role in dramatic falls in the U.S. stock market, including Nvidia. I think this is useful in bringing out the complex dynamics between participants and therefore the implicit risk of trading under such embattled conditions.

Posted Using InLeo Alpha