Stocks owned by Nvidia saw surge in bullish bets days before filing sparked massive rally

By Joseph Adinolfi

Trading in bullish options contracts tied to two small-capitalization companies owned by chipmaker Nvidia Corp. surged last week just days before the company released a routine filing.

Although Nvidia's (NVDA) involvement with the two companies was already public knowledge, the filing of Nvidia's first 13-F filing with the U.S. Securities and Exchange Commission last Wednesday triggered a rally in their shares, leaving the buyers of these call options sitting on huge gains on the day the contracts were set to expire.

See: Nvidia discloses positions in SoundHound AI, Arm - and these other stocks

Options volume for bullish call options tied to Nano-X Imaging (NNOX), a small Israeli medical-device company, was virtually nonexistent before Feb. 12, according to data from FactSet. But suddenly, on that day, trading in calls with a strike price of $7.50 that were set to expire a few days later on Feb. 16 suddenly surged from zero contracts on Feb. 9 to 7,578. The strike price, which was more than 10% out of the money at the time of purchase, ultimately proved to be more than 40% below Friday's closing price.

Volumes in out-of-the-money calls tied to Nano-X surged after Nvidia revealed in a routine SEC filing that it still owned shares of the Israeli company, along with a host of other companies including Arm Holdings.

Shares of the company surged more than 95% between Feb. 12 and Feb. 16 from $6.64 to $12.95. The same call options that traders had purchased for roughly 17 cents apiece on Feb. 12 were worth $5.50 apiece by the time they expired on Friday, a gain of more than 3,000%, according to FactSet data.

Call options tied to SoundHound (SOUN) saw a similar spike in demand that began the week before the filing's release. Shares rose by nearly 70% to $3.82 apiece between Feb. 14, the day the filing was released after the bell, and Feb. 16, the day most of those options expired.

The spike in demand for these options was previously reported by The Financial Times.

The SEC's Edgar platform doesn't show any prior 13-F filings for Nvidia dating back to 2001, so it isn't clear when all of the company's investments were made or how they have changed recently.

Nvidia has owned small amounts of New York-listed Nano-X and SoundHound stock for several years though. SoundHound had emphasized the chipmaker's backing when it went public via a merger with a blank-check company in 2022. Nvidia's position in Nano-X was worth less than $1 million and had been indirectly acquired years ago when Nano-X bought a different business in which Nvidia had invested.

Henry Hu, a professor of finance at the University of Texas, said some traders appeared to have been betting that other investors would "overreact" to immaterial news because of "the magic dust of AI", according to the FT.

Trading volume in shares of both companies also started to climb ahead of the Nvidia's filing. The number of shares of SoundHound that changed hands more than doubled to 37.5 million between Feb. 8 and Feb. 9, before jumping to 38.4 million on Feb. 14, according to FactSet data.

In terms of magnitude, the spike in trading volume was even larger for shares of Nano-X, which saw their daily volume climb from 412,241 shares on Feb. 9 to 3.9 million shares on Feb. 12. Volume later soared to more than 47 million on Feb. 15 as the company's shares soared nearly 50% in a single session.

The size of Nvidia's positions in these stocks was relatively paltry, according to the filing. The chipmaking giant's stake in Nano-X was worth about $400,000 as of Dec. 31, the deadline for the filing. Its stake in SoundHound was worth $3.7 million.

Nano-X shares fell more than 20% on Tuesday to close at $10.34 as the hype from last week started to fade. Shares of SoundHound AI gained another 4.5%, finishing Tuesday at $3.99.

-Joseph Adinolfi

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02-21-24 0942ET

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