QQQ Options Bear Targets Bigger Tech Losses

QQQ could find a foothold near its 80-day moving average

by Karee Venema

Published on Feb 8, 2018 at 2:24 PM
Updated on Feb 8, 2018 at 2:26 PM

Volatility has ramped back up on Wall Street, with the CBOE Volatility Index (VIX) earlier this week topping the key 50 handle for the first time since August 2015. Most of the price action for stocks has occurred to the downside, and the tech sector has not been immune. More specifically, the PowerShares QQQ Trust (QQQ) has plunged 8.5% from its late-January record high of $170.95 -- a move that may have been exacerbated by this "alarm bell" -- and one options trader today appears to be targeting even bigger losses for the tech shares over the next several weeks.

Taking a quick step back, roughly 696,000 puts and 312,000 calls have traded on QQQ so far today -- 1.8 times what's typically seen at this point, and total options volume pacing in the 95th annual percentile. Most notable is what appears to be a split-strike put butterfly spread in the back-month series.

According to Trade-Alert, one speculator bought to open 15,000 March 143 and 159 puts, while simultaneously selling to open 30,000 March 151 puts. The trader paid $1.20 per spread, translating into an initial net debit of $1.8 million (15,000 spreads * premium paid * 100 shares).

Ideally, QQQ will settle right at $151 -- a 3.9% drop from current levels -- when the options expire at the close on Friday, March 16, allowing the trader to pocket the full potential payout of $6.80 per spread (higher-strike bought put - sold strike - net debit), or $10.2 million. Meanwhile, the maximum risk is limited to the net debit paid, should QQQ close above $159 or below $143 at expiration.

Looking closer at the charts, QQQ was last seen trading down 1.6% at $157.61. The shares are still boasting a 23.7% year-over-year lead, and are testing a foothold near their 80-day moving average -- a familiar layer of support that contained several pullbacks in 2017. As such, today's activity in QQQ's options pits could be indicative of a long tech trader initiating a hedge against any additional downside risk.


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