The NVDY fund manager really fucked up in the last 24 hours lol

EDIT: There is a really great TLDR in the replies if you’d prefer not to read all this lol

I’m not the greatest at explaining these things but I will try, I know I’m probably going to use incorrect terminology at times, but I have a pretty good conceptual grasp of what’s happening, so just bear with me please. If you want a better explanation, go to minute 14 and 30 seconds of this video: https://youtu.be/vbKS82_ntJM?si=EY6DDyrx9e-xbtst

Anyways, the NVDY fund had two synthetic NVDA positions, one with a strike price of $148 per share and another at $138 per share. NVDA had been trading below both of these strike prices by a significant amount. Yesterday, NVDA cratered and hit an intraday low of like $127 and closed at $129.

So the fund manager figured it would be wise to cut losses and close out some of the synthetic positions with the $148 strike, which has a maturation date of February 21st, meaning that in order to make money, the stock price of NVDA needs to be at $148 or higher by that day for the fund to be profitable.

Anyways, they figured that waiting till Feb 21 would be too pointless, so they paid a total of $60M to close out some of this position. They still have synthetic shares with a $148 strike price, but not as many as before. They are just down $60M because of this move.

They also opened a new synthetic position with a strike price of $127 per share, so they had to pay to open those positions as well and buy calls and puts to create this new synthetic position also with a close of February 21st, but at the very least this synthetic position is below the current share price.

In addition to that, yesterday they sold a weekly covered call that has a strike price of $134 which was only 2.77% out of the money at the start of today’s trading day when NVDA had closed at $130.39. This trade has an expiration of next Friday December 27.

Well, we are almost certainly going to lose money on that trade as NVDA jumped up immensely today (+2.66% at the time of writing this post), and spent most of the day trading above $134 per share. I suppose if you’re in this fund you kinda have to root for NVDA to drop in order to make money on the weekly trades, but you’d also prefer that NVDA do well and not drop at all because as NVDA moves, so too does NVDY.

Overall, not a great last two weeks for NVDY in terms of losing their weekly trades and closing out synthetic positions maybe a little prematurely.

If I have one critique for how this fund operates, it’s that they often open weekly covered call positions with a strike price that is too close to the current share price. Like instead of selling a call with a strike price that is 2-3% out of the money, I’d rather they sell them more like 4-6% out of the money. NVDA has a tendency to have big jumps in a single day, and we are all accustomed to seeing it pop like 2.5% in a single trading day, this makes it totally possible to lose out on your weekly trades all of a sudden.

I understand that the further out of the money a call one sells is, the less money there is to be made from the premium from selling that call, but there’s gotta be a good balance between just a hair out of the money and so far out that you barely make any premium at all.

Lastly, I’m not a fan of these huge spreads that they often do. Like for each call they sell, they’ll also buy a put with a strike price that is like $7-12 higher. In theory this would be helpful for protecting us from potential losses if the underlying stock price just rockets up $15 or $20 in a week and blows past the strike price for both the call and the put, but what most often happens is that at the end of the week the share price of NVDA lands in between the call and the put and so money was lost by buying this put which was supposed to help protect us, and money was also lost by picking a call strike price too close out of the money.

I hope this all made sense. If I messed up on any of the terminology here, please feel free to (politely) correct me, or if something is unclear let me know and I’ll try and clarify myself or reword things.