Despite the Magnificent Seven hitting record highs, there are signs of cracks in AI trading. Concerns about OpenAI’s revenue growth are hurting neocloud stocks, with chips selling off on Tuesday on concerns about competition from China.
Given that the Federal Reserve will raise interest rates for the first time since 2023 in September, and that further hikes are expected soon after, indexes with high tech stocks are often at a disadvantage when it comes to rate hikes.
Those pressures are real, but options traders are bracing for bigger moves than the Nasdaq has shown in recent weeks.
QQQ-san The implied volatility index (IVx), a measure of how much movement options traders are pricing in, closed at around 20.7% on Monday. This puts the volatility of the Nasdaq 100 on par with small-cap stocks. The Russell 2000 typically has a higher IVx than the Nasdaq 100, but currently QQQ and iShares Russell 2000 ETF (IWM) The SPDR S&P 500 ETF (SPY) remains at 15%, but is essentially tied at around 20.7%. And for 29 consecutive times, QQQ’s IVx has exceeded the volatility actually delivered by the index by at least 3 points.
In other words, every day since early September, options have priced in a bigger move than QQQ ultimately made. This week’s sell-off has not yet closed that gap.
That gap is an opportunity.
If the market declines but moves more slowly than the options expected, traders can collect a higher price while setting a strike lower than the market they are already in by selling premium on the weakness.
trade
Based on Monday’s closing price, I would sell the November 13th 720/710 put spread for a credit of approximately $1.81.
This is a bullish-to-neutral trade, consistent with how QQQ is trading this fall. Despite this week’s decline, QQQ is up about 5% since early September, hitting an all-time high just a week ago. There is no need for a pullback to reverse the trade, it just needs to remain suppressed until November 13th or until it is managed. As long as QQQ remains above $720 until November 13th, the maximum profit will reach $181. The short $720 put is located near $726, below the 50-day moving average, and the long $710 put is located near $713, slightly below market expectations. The break-even point is $718.19, about 3.7% below Monday’s closing price, leaving room for further decline through earnings season.
The choice of the Nov. 13 weekly was made to avoid NVIDIA’s earnings report, which is expected around Nov. 18. QQQ’s options are liquid enough that we can consider the company’s weekly for this trade.
If QQQ closes below $710 approximately 4.8% lower by the deadline, the maximum loss will reach $819. The credit is a little lighter, but that’s the tradeoff for the wider cushion. The trade has a 70% theoretical probability of profit and an 80% theoretical probability of recovering half of the maximum profit. If QQQ ends between $710 and $720 at expiration, you can assign a short put and are obligated to buy 100 shares at $720 per spread. After credits, the real cost basis is $718.19, approximately 5.5% below the all-time high. The last time QQQ closed below $720 was on September 17th. Because of that risk, consider exiting or rolling the trade before expiration rather than holding it until settlement.
The biggest risks are coming: Wednesday’s CPI, bank and Taiwanese semiconductor earnings this week, and Microsoft and Alphabet releases to coincide with the Fed’s Oct. 28 decision.
The Nasdaq is under pressure but has not yet outperformed option prices. This trade sells on that weakness and leaves room for a little more growth.
Disclosure: Spina owns this transaction.
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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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