With apologies to John Lennon and Plastic Ono Band for the title of the article about VXN and QQQ.
The recent hot stock rally, especially on the NASDAQ 100, has brought the bulls back into charge and put the bears into hibernation. It’s definitely not certain that the momentum will proceed.
What is for certain, nonetheless, is that some stock metrics are definitely getting an increasing number of extreme, warranting caution. Protection or playing for potential flaws is something to seriously consider.
As a substitute of simply pulling back or shorting stocks, using option strategies makes more sense in the present environment.
Listed here are three principal reasons why now is likely to be the best time to buy bearish puts, whether to protect your portfolio or to make a short-term speculative trade.
Implied volatility
Most of you’re probably conversant in the VIX, sometimes called the Fear Meter. That is a measure of option prices within the S&P 500. How a lot of you understand that the NASDAQ 100 has a similar instrument to measure implied volatility -VXN- or “Vixen”. Below is the definition from the Chicago Board Options Exchange (CBOE) for VXN. For our purposes, we convert QQQ to NDX because QQQ’s turnover is far larger.
Cboe NASDAQ-100 Volatility IndexSM (VXN) is a key measure of market expectations for short-term volatility provided by the NASDAQ-100® Index option prices (NDX). Measures market expectations for the 30-day volatility contained within the short-term prices of NASDAQ-100 options. VXN is expressed in percentage points.
The VIX has fallen sharply recently as stocks have surged over the past month. The VIX closed barely above its year-round lows on Friday because the S&P 500 surged, though removed from its annual highs.
Nonetheless, VXN closed at a latest yearly low on Friday because the NASDAQ 100 (QQQ) closed at a latest yearly high. Also, VXN closed at its lowest level since January 2022.
A fast comparison of the last time QQQ was at comparable prices will show how much the drop in VXN lowers the selling price. Comparative option assemblies are shown below.
On August 25 last 12 months, QQQ closed at $320.58. November 18p The $315 put option had 85 days to expire and was priced at $14.00. IV was just over 29 years old.
Fast forward to Friday, and QQQ closed at $320.93, just 38 cents up from August. The $315 put option expiring on June 30 had 91 days to expire, a few days longer than a similar one on November 18p expiration date starts in August. June 30p items were priced at $11.00. IV was lower than 24 years old.
Putting all of it together, the marginally underperforming $315 put options from August last 12 months traded $3.00 cheaper than the virtually similar puts currently traded.
One other way to have a look at it’s that positions back in August cost 4.37% of the QQQ price compared to just 3.43% now. All because IV dropped from 29.04 to 23.76. For me, buying an item at a much lower cost (and the bottom price in a very long time) isn’t a bad thing.
VXN can also be a reliable timekeeping tool available in the market, very similar to VIX on this regard. Dips to relatively lows in VXN almost all the time coincide with short-term highs in QQQ, because the chart below shows. Is QQQ close to $VXN high suggests yes.
technique
The NASDAQ 100 (QQQ) is technically overbought. The 9-day RSI has already crossed 70. Bollinger Percent B has just crossed 100. The MACD has reached its extreme. The stock is trading at a large premium to its 20-day moving average. Last time, all of those metrics aligned in a similar fashion, marking a short-term high in QQQ.
The NASDAQ 100 (QQQ) is a bit skis compared to the opposite three major indices. Nazzy is showing a spectacular increase of greater than 20% in 2023 up to now. Compare that to the still very respectable gain of nearly 7.5% for the S&P 500 (SPY) and it is simple to see how much QQQ has rallied compared to other stocks in Q1. When you compare the QQQ gains with the performance of IWM (Russell 2000) or DIA ( Dow Jones Industrials), the outcomes are much more astonishing.
Definitely, a number of the NASDAQ 100’s higher performance is warranted on condition that it was the worst-performing Big 4 index in 2022. Nonetheless, these higher performances at the moment are reaching the acute. Expect QQQ to underperform in the approaching months because the comparative spread returns to a more traditional relationship.
Basics
Two stocks, Microsoft (MSFT) and Apple (AAPL), account for greater than 25% of the load of the NASDAQ 100 index. Additionally they include over 13% of the S&P 500 index– the primary time two stocks have been this powerful since IBM and AT&T within the late Nineteen Seventies. As well as, they’re the one stocks with a market capitalization of greater than $2 trillion.
Very similar to those two stocks, so is the NASDAQ 100 and stocks generally. A have a look at the valuations of those two big corporations provides you with a good insight into QQQ’s overall valuations.
Microsoft’s highest weighted Price/Sales (MSFT) ratio has already returned to well above 10 and is the very best since August 2022, when QQQ peaked.
Number two Apple paints a similar picture.
MSFT’s price/earnings ratio is much more extreme, now at a higher level than the previous QQQ price peak. All of this even with rates of interest rising sharply over this time-frame, which should cause the multipliers to fall.
Option prices are low-cost. The NASDAQ 100 is technically overbought and fundamentally overvalued. Putting these two statements together signifies that buying positions on QQQ is less expensive and rather more sensible than ever this 12 months. All we want is for the market to return to its apparent sensitivity to put profits.
RETURN Options
What to do next?
When you are on the lookout for the perfect options trading in today’s market, it is best to try our latest presentation How to trade options with POWR rankings. Here we show you the way to consistently find the perfect options trades while minimizing your risk.
If this appeals to you and you would like to know more about this powerful latest options strategy, click below to access this up-to-date investment presentation now:
How to trade options with POWR rankings
All the perfect!
Tim Biggam
QQQ shares closed Friday at $320.93, up $5.25 (+1.66%). 12 months-to-date, QQQ has gained 20.71%, compared to the S&P 500 index’s gain of seven.46% over the identical period.
In regards to the Writer: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Chief Options Strategist at ThinkorSwim and three years as Market Maker for First Options in Chicago. He appears often on Bloomberg TV and is a weekly contributor to the TD Ameritrade network “Morning Trade Live”. His overriding passion is to make the complex world of options more comprehensible and due to this fact more useful to the on a regular basis trader. Tim is the editor RETURN Options Bulletin. Discover more about Tim’s past with links to his latest articles.
Post Three great reasons to say “Give me a probability” first appeared on StockNews.com