The $2.3 Million Options Trade on QQQ

Breaking down two short-term options hedges on tech-rich PowerShares QQQ Trust (QQQ)

May 9, 2017 at 2:05 PM
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Tech has been on a tear lately, with Apple and Amazon stocks just two of the big-cap names hitting record highs. As such, the tech-rich Nasdaq Composite (COMP) is exploring all-time highs for the third straight session, as is the PowerShares QQQ Trust (QQQ) exchange-traded fund (ETF), which recently flashed a signal seen just one other time since the dot-com era. Against this backdrop, it looks like some options traders are paying up to either bet on or hedge against a tech-sector pullback. 

According to Trade-Alert, one speculator likely bought to open a block of 10,000 QQQ July 137 puts for $2.31 apiece, or a cool $2.31 million (premium per contract x 100 shares per contract x 10,000 contracts). With QQQ just off a record high of $138.63, these puts are currently out of the money. If the trader is a "vanilla" option bear, he's expecting QQQ to retreat back beneath $134.69 (strike minus premium paid) by July options expiration. More likely, however, the trader is buying options insurance; the protective puts are a portfolio hedge.

The biggest QQQ options trades today, however, consisted of simultaneous blocks of 20,000 contracts traded at the May 134.50 and 137 puts. If the options were opened, the trader may have opted for a less expensive form of shorter-term QQQ insurance, establishing a bear put spread. Specifically, the investor would have bought the May 137 puts for $0.45, and helped fund the purchase by selling the May 134.50 puts for $0.14, resulting in a debit of $0.31 per spread, or $620,000.

In this instance, the speculator is covered on a breach of $137 before May options expiration, and the spread will profit if QQQ ends below $136.69 (bought strike minus net debit). But while the aforementioned July 137 put buyer's profit will increase the lower QQQ moves south of breakeven by expiration, the spread trader's profit is capped at $2.19 per spread (difference between strikes - net debit), no matter how far QQQ may fall beneath the sold put strike.

However, it's not a bad time to be a QQQ short-term option buyer. The ETF's Schaeffer's Volatility Index (SVI) of 9% is in just the 6th percentile of its annual range, pointing to historically low volatility expectations among near-term options traders. Plus, PowerShares QQQ Trust (QQQ) sports a Schaeffer's Volatility Scorecard (SVS) of 75, indicating the shares have exceeded the options market's volatility expectations over the past year.


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