QQQ Tip?

by Dan October 12, 2017 3:19 pm • Trade Ideas

Last week we spoke about the price action in mega-cap tech stocks, a small grouping of less than ten that you all know very well that make nearly half the weight of the Nasdaq 100, and account for a large part of the index’s year to date gains (read here: QQQ – Queuing Up? and Tick Tock – QQQ). At the time we highlighted the relative cheapness of at the money options in both vol and dollar terms heading into earnings season. While I am not personally involved one way or the other in the QQQ, the etf that tracks the Nasdaq 100, I opined:

No matter what your directional view, short-dated options prices appear to be dollar cheap in the Nasdaq 100, vs $146 in the Nov 17th 146 straddle (the call premium + the put premium) is offered at about $5 or about 3.5% of the etf price. If you bought that, and thus the implied move of the QQQ over the next 5 weeks, $151 or higher or $141 or lower to make money. What’s also important about the choice of Nov expiration to measure this movement is that most of the Nasdaq 100 will have reported their calendar Q3 results.

Today there was some options activity in the QQQ that is notable for a few reasons, first the expiration, fairly long-dated, Jan 2019. Second, the size, some serious heat, in contract and in premium terms, and third the fact that they are downside puts with the market very near all-time highs, in the index or in this case the etf that tracks the index that has the best year to date performance of its U.S. peers, up nearly 26%!

Shortly after the open large blocks of the Jan 2019 135 puts started being bought on the offer when the etf was just below $148. Lets call it 76,000 Jan19 135 puts being bought for about $6.60 between 9:46am and 12:41pm. That premium amounts to about $50 million and break-evens down about 13.5% at $128.40 in about 15 months.

The one year chart of the QQQ shows how $128/129ish is intermediate term support:


While the five-year chart shows a potential air pocket below $130 down to long-term support between $115 and $120:


What’s that old saying but that old guy who is a pretty good investor?? Be fearful when everyone is greedy??

Calling a top on a record-setting bull market is a fools errand, I suspect this is some downside protection for a large investor who is looking to protect against the sort of market decline we have not seen since early 2016.

The other interesting thing about the selection of strike is that even if we don’t see that sort of massive decline, vol is so low that even a slight correction would mean a spike in vol for a strike like this. In other words, it doesn’t even need to be in the money for this to be quite profitable.