Options Measures Suggest Fervor for Technology Shares May Ebb

(Bloomberg) -- Options measures that recently were showing extreme optimism about technology stocks are now coming off, a sign to RBC Capital Markets that it might be worth deploying some hedges.

Skew, which measures the cost of bearish options versus bullish ones, had recently gone to lows on stocks like Facebook Inc. and Tesla Inc., showing not only general demand for upside, but strong speculative fervor as investors bet on big further gains. That’s reversing now, according to RBC Capital Markets derivatives strategist Amy Wu Silverman.

“Short term antsiness is starting to play out in some of the market’s most beloved names,” Wu Silverman wrote in a note Sunday. “We are seeing pickups in skew in FANGMAN stocks where call exuberance reigned supreme all summer,” she said, using an acronym to refer to the biggest of large-cap stocks like Amazon.com Inc. and Microsoft Corp. She added, “The most common question I receive from portfolio managers is: how do I hedge my winners?”

The softening in bullish behavior comes as the S&P 500 loses momentum near its February record high. And the megacaps have “acted so well for such a long time that they could be due for a breather,” according to Matt Maley, chief market strategist at Miller Tabak + Co.

“With one- and two-month skew picking up in megacap Tech, consider put spreads to hedge winners heading into fall,” Wu Silverman recommended. And on a longer-term horizon, she suggested a trade involving selling a call and buying a put, saying: “call skew premiums are still hefty versus S&P through January 2021. Use zero-cost collars to take advantage of this landscape.”

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