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Traders placed an unusually large number of bets on two obscure companies at the start of last week, days before a disclosure by chipmaker Nvidia triggered a furious rally in their shares.
Nano-X Imaging, a small Israeli medical device maker, doubled after Nvidia detailed its position in the company in a regulatory filing last Wednesday. SoundHound AI, a Silicon Valley-based artificial intelligence group, rose 69 per cent after the same Nvidia filing highlighted a holding in it.
The explosive market reaction to seemingly trivial updates was the latest sign of investor fervour for stocks that could benefit from the growth of AI, particularly those with any link to Nvidia.
Nvidia’s own stock has more than quadrupled since the end of 2022, giving it a market capitalisation of about $1.7tn, and its quarterly earnings update scheduled on Wednesday is seen as a signal event in determining whether the wider market will be able to sustain its recent rally.
Two days before Nvidia’s filing, traders bought thousands of short-term options contracts that would pay out if there was a sharp jump in Nano-X’s stock.
The volume of call options — contracts which confer the right to purchase an underlying security at a given price by a set date — that traded on February 12 was a dozen times higher than the daily average over the preceding six months.
The bulk of the trades were for a contract that expired on Friday and gave the right to buy Nano-X stock for $7.50 per share — 42 per cent less than Friday’s eventual closing price or $12.95.
The trader or traders paid between 4 and 30 cents a contract on February 12. On Friday the same contracts changed hands for as much as $6.40, a trough to peak increase of almost 16,000 per cent.
Investors traded more than six times the average volume of SoundHound call options on February 9, and more than three times the average volume on February 12. Unlike with Nano-X, however, the volume of put options — which offer protection against a share price decline — was also higher than normal.
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”.
Nvidia has owned small amounts of New York-listed Nano-X and SoundHound stock for several years. SoundHound had emphasised the chipmaker’s backing when it went public via a merger with a blank-cheque company in 2022. Nvidia declined to comment.
The chipmaker’s investments were only highlighted last week due to a regulatory quirk that forced Nvidia to file a form detailing the precise size of its US-listed holdings for the first time. Nvidia was an anchor investor in the initial public offering of chip designer Arm last year, and the subsequent increase in Arm’s shares pushed the value of Nvidia’s public investments over $100mn, the threshold for filing a quarterly disclosure under the rules of the US Securities and Exchange Commission.
Nvidia’s position in Nano-X was worth less than $1mn and had been indirectly acquired years ago when Nano-X bought a different business in which Nvidia had invested.
Direct trading in Nano-X’s stock also jumped before Nvidia’s disclosure. Last Monday was the busiest day of trading in Nano-X shares in terms of volume since it reported second-quarter financial results last August, and its sharpest one-day price increase since November.
Nano-X has long been a battleground between supporters and short sellers who have accused it of fraud. Last year the company and its former chief executive agreed to pay a combined $1.1mn to settle SEC charges that it had misrepresented manufacturing costs. Nano-X did not respond to a request for comment.
One investor with a small short position against Nano-X compared the reaction to the “meme stock” phenomenon of 2021, when retail investors drove up the prices of heavily-shorted companies without any change in those companies’ fundamental prospects.
“It doesn’t matter that the story is bullshit, all that matters is it’s going up, it’s now a meme,” he said.
Trading volumes in SoundHound shares also jumped ahead of Nvidia’s regulatory filing. Monday, February 12 and the preceding Friday, February 9, were the two busiest days for SoundHound in six months. SoundHound did not respond to a request for comment.
Hu, formerly a senior SEC official, said that even if the stock and options had been bought by insiders, the fact that Nvidia’s positions were not new would make it hard for regulators to prove the trades constituted a breach of insider trading laws.
Asked if it was looking into recent trading in Nano-X and SoundHound, an SEC spokesperson said the agency “does not comment on the existence or non-existence of a possible investigation”.
