Growth-Stock Scare Looking Like a False Alarm to Options Market

(Bloomberg) -- The options market is casting doubt on the idea that the plunge in growth stocks that started the week is the beginning of a painful rotation out of the sector that drove the years-long rally in U.S. equities.

When looking at three-month options on the exchange-traded fund tracking the Nasdaq 100 Index, the spread in implied volatility hasn’t moved much between puts protecting against a 10% drop and calls that benefit from a 10% increase. The metric known as skew remains at less than 10 -- below this year’s average and about where it started 2020, before the Covid-19 pandemic roiled markets. Option skews on other growth and technology ETFs are sending a similar message.

“We are not seeing an overwhelming amount of hedging,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. He did point out heavy volume in puts on the ETF protecting against a drop to $265, or more than 8% below current levels, by April. “But even that is not extreme or out of the ordinary.”

The ETF known by its ticker symbol QQQ tumbled almost 4% in the first two days of the week, before recouping about half that loss Wednesday. The drop occurred after Pfizer Inc. and BioNTech SE announced promising test results for an experimental coronavirus vaccine, triggering a selloff in stocks that have thrived during the pandemic lockdowns.

One reason that measure of skew remains low is that implied volatility on options that pay off should the ETF gain 10% are “pretty sticky,” Murphy said. In other words, demand remains strong for calls that would benefit from a continued rally in the index.

The implied volatility spread between three-month options priced 10% below the ETF’s current level and those near where it’s trading at now has risen to about 5.7 from 3.4 on Sept. 29, yet still well below the elevated levels of earlier in the year.

“It’s up over the past month, but still not dramatic,” Murphy said.

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