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 is actually not certain that the momentum will proceed.
What is definite, nevertheless, is that some stock metrics are definitely getting increasingly extreme, warranting caution. Protection or playing for potential flaws is something to significantly consider.
Instead of simply pulling back or shorting stocks, using option strategies makes more sense in the present environment.
Here are three essential explanation why now is likely to be the proper time to purchase bearish puts, whether to guard your portfolio or to make a short-term speculative trade.
Implied volatility
Most of you might be probably aware of the VIX, sometimes called the Fear Meter. This is a measure of option prices within the S&P 500. How a lot of that the NASDAQ 100 has an identical 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.
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.
However, VXN closed at a recent yearly low on Friday because the NASDAQ 100 (QQQ) closed at a recent 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 yr, QQQ closed at $320.58. November 18p The $315 put option had 85 days to run out 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 run out, a couple of days longer than an identical 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 yr traded $3.00 cheaper than the virtually similar puts currently traded.
Another approach to take a look at it’s that positions back in August cost 4.37% of the QQQ price in comparison with 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 protracted time) is rarely a foul thing.
VXN can also be a reliable timekeeping tool out there, very just like VIX on this regard. Dips to relatively lows in VXN almost at all times coincide with short-term highs in QQQ, because the chart below shows. Is QQQ near $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 big premium to its 20-day moving average. Last time, all of those metrics aligned similarly, marking a short-term high in QQQ.
The NASDAQ 100 (QQQ) is a bit skis in comparison with the opposite three major indices. Nazzy is showing a spectacular increase of greater than 20% in 2023 to date. 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 in comparison with other stocks in Q1. If you compare the QQQ gains with the performance of IWM (Russell 2000) or DIA ( Dow Jones Industrials), the outcomes are much more astonishing.
Certainly, a few of the NASDAQ 100’s higher performance is warranted provided that it was the worst-performing Big Four index in 2022. However, these higher performances are actually 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 burden of the NASDAQ 100 index. They also 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. In addition, they’re the one stocks with a market capitalization of greater than $2 trillion.
Much like those two stocks, so is the NASDAQ 100 and stocks generally. A take a look at the valuations of those two big corporations offers you a very 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 an identical picture.
MSFT’s price/earnings ratio is much more extreme, now at the next 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 far more sensible than ever this yr. All we’d like is for the market to return to its apparent sensitivity to place profits.
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Tim Biggam
QQQ shares closed Friday at $320.93, up $5.25 (+1.66%). Year-to-date, QQQ has gained 20.71%, in comparison with the S&P 500 index’s gain of seven.46% over the identical period.
About the Author: 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 commonly 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 subsequently more useful to the on a regular basis trader. Tim is the editor RETURN Options Bulletin. Find out more about Tim’s past with links to his latest articles.
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