The Nasdaq Composite (CCMP) and the Nasdaq 100 (NDX) are the only two major U.S. equity indices that are not up on the year, despite out-sized rallies (compared to the S&P 500) off of their respective February lows. Since both the CCMP & the NDX are both down about 1% on year you would think they’re pretty comparable. But there’s a big difference. The top 5 holdings of the NDX (QQQ for the purposes of this post) make up 40% of the weight of the etf. Those stocks? You guessed it, five of the largest equities in the world, Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN) & Facebook (FB). They total a whopping $2.1 trillion in market cap.
This concentration of mega-cap tech makes the QQQ a must watch global index.
Today when the QQQ was $110.11, there was an opening buyer of 50,000 of the Aug 105 / 95 put spreads, paying $1.13, or $5.65 million in premium. This put spread breaks-even at $103.87, offering profit potential of up to $8.87 down to $95, with max gain at $95 or below of $8.87, or about 8% of the etf price.
I’ll offer my usual caveat. We have no idea if this is an outright bearish bet, a hedge against the etf or a basket of similar stocks. So we will focus on what we do know and not place too much emphasis on anything else.
The break-even is just above the recent bounce level of $104 (where the stock was 3 weeks ago) while max profit comes at the $95 level (which was the February low):
Taking a slightly longer term view… aside from the Aug 24th 2015 flash crash low, the QQQ has not broken the uptrend that has been in place since its lows in March of 2009. The inability of the etf to make a higher high suggest a re-test of the uptrend at $100 could be back on the table. On a break-below there’s little technical support till the mid $80s:
Short dated options prices are very near 2016 lows, a couple points above the 52 week lows made last July, with 30 day at the money implied volatility at 13.5%, down from its Feb high of 30%:
While options prices appear very cheap, remember we’re in a quiet summer trading period with low volume and little volatility until we get to the late July FOMC meeting. Cheap options may get even cheaper, making long outright options premium expensive without corresponding market moves. It could make sense to look to finance August QQQ puts for those inclined to buy mega cap tech protection or an outright bearish bet, that will catch the bulk of Q2 earnings and the FOMC meeting.
So what’s my trade?
We are going to wait and see how the market trades into the FOMC meeting next week on June 15th, maybe we get a further squeeze and a new high in the SPX, which could set up for a trade like this:
QQQ ($110.10) Buy July / Aug 105 put spread for 85 cents
- Sell to open 1 July 105 put at 70 cents
- Buy to open 1 Aug 105 put for $1.55
Break-even on July Expiration:
Max gain at $105, max loss of 85 cents in the event of a sharp move above of below the 105 strike.
Rationale: The ideal scenario is that the QQQ works its way over the next few weeks back towards 105 and the decay of the short put in July offsets the decay of the long Aug put while Aug gains in value by the increase in deltas. At some point, as the July put loses most of its value we will look to spread the long Aug put by either selling another put of a different expiration, likely a weekly prior to Aug and making another calendar, possibly a diagonal, or selling a lower strike put in Aug making a vertical put spread.