Options Traders Spend Millions to Protect Tech Stock Profits

Bullish traders may be buying put options to protect profits from the 2017 tech stock rally

Mar 14, 2017 at 2:23 PM
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Tech stocks struggled in the immediate aftermath of Donald Trump's election win. It's been a different story in 2017, though, with the PowerShares QQQ Trust (NASDAQ:QQQ) rallying 10.7% year-to-date to trade at $131.20, putting the exchange-traded fund (ETF) just pennies from its March 1 record high of $131.68. However, the broader stock market has cooled in recent sessions, which could be enticing long-term bulls to buy downside protection by way of QQQ put options. 

Digging in, today's put/call ratio for QQQ is 1.69, with the put skew coming as a result of two big trades that occurred at the April 128 strike. Shortly after the open, blocks of 19,406 and 20,001 contracts crossed at the strike mere seconds from each other. If these puts were purchased by the same trader, he or she paid out roughly $3.7 million (number of contracts * 100 shares per contract * ask price of 93 cents). In the simplest terms, this will allow the trader to profit from a move below $128. 

We noted similar hedging behavior on the ETF last month, too. In fact, QQQ put open interest now stands at 2.8 million contracts, ranking in the 92nd percentile of its 12-month range. Plus, the ETF holds a 50-day put/call volume ratio of 1.91 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which is higher than 84% of all comparable readings from the past year. 

To be sure, it's a great time to buy QQQ options. For one, its Schaeffer's Volatility Scorecard (SVS) is 73, pointing toward a tendency to exceed options traders' volatility expectations during the past year. Plus, the ETF has a Schaeffer's Volatility Index (SVI) of 10% -- just 11 percentage points from a 52-week low. This tells us unusually low volatility expectations are being priced into near-term options at the moment. 

While the recent demand for long put options could be attributed to hedging activity, that's not to say everyone's bullish on the tech sector. For instance, short interest on QQQ is up more than 21% since Jan. 1. And from a technical perspective, PowerShares QQQ Trust (NASDAQ:QQQ) has run hot. This is according to the ETF's 14-day Relative Strength Index (RSI), which, at 73, stands in overbought territory. 

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