Why You Should Buy Calls On These 2 Tech ETFs Before October

October tends to be the best month of the year for QQQ and XLF

Sep 25, 2017 at 3:11 PM
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Tech stocks have taken a tumble lately, led by a steep slide in Apple (AAPL) shares. Since touching a record high of $146.59 on Friday, Sept. 15, the PowerShares QQQ Trust (QQQ) has pulled back close to 2.7%. Likewise, the Technology Select Sector SPDR Fund (XLK) touched an all-time peak of $59.17 on Tuesday, Sept. 19, but has subsequently slid 2.3%.

Today, both tech-based exchanged-traded funds (ETFs) are pacing for their worst session since Aug. 17, with Facebook (FB), Apple, and fellow FAANG stocks Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL) all in the red. Below, we'll talk about the crazy demand for out-of-the-money (OOTM) put options on QQQ and XLK, even as the funds approach what has historically been their best month of the year. 

Demand Soars for QQQ Put Options

As with the S&P 500 Index (SPX), OOTM put options on QQQ are more expensive than usual. The 18.9% implied volatility (IV) to insure against a 5% QQQ slide in the next month (via the October 135 put) is way higher than the 11% IV of the October 150 call, which is 5% above the current QQQ price. What's more, the IV of the OOTM put is roughly double the fund's 30-day historical volatility (HV) of 9.6%. Against this backdrop, the 10-day moving average of the tech fund's OOTM put/call skew is now approaching 2.0 -- exceeding the pre-election peak from September, and marking the highest since at least 2009 (as long as we have data).

Per Trade-Alert, QQQ currently has 3.29 million OOTM puts in open interest -- more than double the 1.41 OOTM calls outstanding. While the in-the-money October 144 put is the most populated among front-month strikes, home to nearly 134,000 contracts, the OOTM October 139 put carries a similarly noteworthy 101,000 contracts. QQQ shares are currently down 1.2% to trade at $142.65.


QQQ out of the money put-call skew

XLK Put/Call Skew Cools from 3-Year High

It's the same story with the XLK, which is down 1.3% at $57.78. The 10.9% IV of the October 61 call (representing a 5% rally in the ETF) pales in comparison to the 18.2% IV of the out-of-the-money October 55 put (representing a 5% drop). Further, the put's IV is more than twice XLK's 30-day HV of 8.5%. The XLK's 10-day moving average of its OOTM put/call skew recently peaked above 1.9 -- the highest point since mid-2014.

XLK's OOTM put open interest stands at 253,000 contracts -- about five times the 54,000 OOTM calls in residence, and representing more than 90% of the fund's total put open interest. In the front-month October series, peak open interest can be found at the now at-the-money October 57 put, home to nearly 4,400 contracts. In the November and December series of options, though, peak open interest stands at the 55-strike puts.

XLK 10day out of the money put-call skew


The Best Time of the Year to Buy Tech Stock ETFs

Despite the recent tech headwinds, the sector has been outstanding in 2017. QQQ is now testing its footing atop its 80-day moving average -- a trendline that coincides with a round 20% year-to-date gain, and contained the fund's late June/early July swoon. Meanwhile, the XLK is also up roughly 20% year-to-date, and could find support atop its ascending 10- and 20-week moving averages. 

It's also worth noting that October is historically the best month to own both the PowerShares QQQ Trust and the XLK. Since inception, QQQ has averaged an October gain of 4%, according to data from Schaeffer's Quantitative Analyst Chris Prybal -- more than double its second-best average monthly gain of 1.7%, which occurs in November. The XLK also tends to shine in October, gaining an average of 3.4% since inception, and rallying another 1.8% in November. Should the funds resume their quest for record highs, now could be an opportune time to buy those relatively inexpensive OOTM call options.

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