of Nasdaq 100 Index It continues its historic run. The total return (valuation + dividends) has exceeded 24% since the beginning of the year, and the index has almost tripled since the end of 2022, rising 193.37% (also with dividend reinvestment). If you’re suffering from a combination of FOMO and dizziness due to rapid price increases, keep reading.
One of the notable features of this rally is its “low width.” The same group of big-cap tech giants does much of the heavy lifting across the index. The top 10 companies in the NDX index account for half of the market capitalization weight.
Narrow leadership means market power is dependent on a small and undiverse group of companies. For investors looking for continued strength while mitigating the risk of a sudden reversal of the same narrow group, the options market may offer an answer. Long technology methods with strictly defined risks.
This secret is a little strange. This is called “implicit correlation,” but it’s worth it, so bear with me. Implicit correlation comes with implicit volatility, or how option traders think about option prices. If the implied correlation of an index is low, the price of options on that index will be low, at least relative to the price of options on individual stocks. Let’s think about it for a moment. Despite a small number of stocks driving index returns, options on the index behave as if the index is well diversified, suggesting there is little risk of the same narrow path suddenly doubling down.
Currently, NDX’s one-month forward implied correlation is only 0.177. To put this into perspective, we are hovering in the 25th percentile, much closer to our three-year low of 0.128 than our three-year high of 0.567. Meanwhile, the 1-month trailing realization correlation is currently 0.158. Another consideration. To what extent do you think this will be idiosyncratic or more macro in terms of near-term catalysts such as revenue, war, midterm elections, etc.?
Basically NDX? QQQ Options receive a very favorable “fair trade” as a long-term premium. You don’t have to pay too much for index volatility. With the November midterm elections looming, new headline risks and sector rotations are poised to be injected into the market. The election, combined with upcoming tech megacap returns and changes in macroeconomic data, set the stage for significant swings in the index.
Therefore, rather than buying QQQ outright and exposing your portfolio to severe downside risk, buying calls at current option prices is a smarter and more capital-efficient way to stay long-term.
Trade: Buy QQQ November 760 Calls
Buy QQQ November 760 calls for approximately $22.70. These at-the-money options cost just 3% of the current price of the underlying ETF. Rewards: There is no cap on upside. These calls could provide leveraged participation in the ongoing bull market if the midterm elections end the uncertainty and tech industry leadership propels the index to new highs. Risk: Strictly defined and limited to premiums paid ($2,270 per policy). If the low-breadth market eventually dries up and rolls over, the capital at risk is mathematically limited to 3% of it.
Disclosure: Tidal owns/holds all securities mentioned in the article.
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This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.
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