Options Markets Show a Creeping Fear That 2018's Winners Will Fall Flat
Traders are starting to worry that U.S. technology and domestically focused stocks are getting tired of winning.
(Bloomberg) -- Traders are starting to worry that U.S. technology and domestically focused stocks are getting tired of winning.
As quarterly earnings reports begin to trickle out, there’s heightened demand for options that provide protection against a downturn in the Nasdaq 100-tracking Invesco QQQ Trust Series 1 exchange-traded fund, better known by its symbol QQQ, as well as the iShares Russell 2000 ETF, ticker IWM.
Strength in tech and small-cap shares has been the stock market story of 2018, with the Nasdaq 100 Index up more than 15 percent and the Russell 2000 Index gaining almost 10 percent on the year, while the S&P 500 Index has advanced less than 5 percent.
The skew for QQQ and IWM -- that is, the ratio between the implied volatility of one-month, 25-delta put options relative to calls -- lingers at historically elevated levels, especially for the tech gauge. It’s another sign of investor unease that fails to comport with the relatively low level of the Cboe Volatility Index, better known as the VIX, which remains below 13.
“Both QQQ and IWM skew remain elevated,” Mandy Xu, chief equity derivatives strategist at Credit Suisse, wrote in a note to clients Monday. “The flat S&P skew versus steep QQQ/IWM/VIX skew suggest investors are gravitating away from S&P for hedging purposes and instead are using either VIX options for tail hedging, or QQQ/IWM which have been the outperformers of the year.”
In other words, traders are mindful of the potential downside in this year’s winners -- or they’re making use of the same way-out-of-the-money options employed by the likes of “50 Cent” and the “VIX Elephant” to protect against an abrupt, major selloff in the U.S. stock market.
What’s more, Goldman Sachs flagged that high-flying tech shares have done better than the underlying macro backdrop would imply, an indication that this quarter’s results and guidance might have to clear a high bar to impress the crowd.
Investors still have a high conviction in their favored tech stocks, even as they hedge against risk in the group in general. This could help explain how the Nasdaq 100 has managed to reach fresh record highs despite relatively limited breadth.
“Investors seem to have high expectations at the stock level, but have concerns at the index level,” a Goldman team led by managing director John Marshall wrote in a note Monday. “Index put-skew is high, suggesting investors are hedging their tech portfolios even as they are maintaining upside exposure at the single stock level.”
To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Andrew Dunn
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