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The NASDAQ 100 ETF (NASDAQ 🙂 is down more than 10% since its peak on September 2, and that drop would be on the verge of much to grow worse. The options market is starting to get active again, with some top tech stocks seeing some notable put-buy and call-selling, and an indication that traders are seeing stocks fall. The last time we witnessed this type of activity was around August 28, just before the market peaked
. On September 16, there was a surge in spread trades across several leading technology stocks, such as Facebook (NASDAQ :), Apple (NASDAQ 🙂 and Microsoft (NASDAQ :). Traders seemed to bet that these stocks would fall from their current prices by mid-October.
The technology sector is one of the hottest in the market, with the NASDAQ 100 ETF up more than 60% from its March lows as valuations hit some of their highs in decades. Nothing should embody how far valuations have risen more than the red-hot IPO Snowflake (NYSE :), which more than doubled on the first day of trading – the stock's valuation reached about 110 times sales.
Decline in Shares of Betting
Open interest rates were up for Oct. 16, Facebook putting $ 270 and calls with about 12,000 contracts each. The data shows that the wells were bought for about $ 12.55 per contract, while the calls were sold for about $ 13.10 per contract. It is creating a bearish spread trade, suggesting that Facebook is below $ 270 by the time the expiration date arrives.
In addition, Apple saw a similar spread transaction; this was also before the October 16 due date. For Apple, however, it was the $ 115 puts and calls that were traded. With the interest outstanding on September 16 it increases by about 30,000 each. Meanwhile, Microsoft saw a similar transaction that expired on Oct. 16, increasing the $ 210 wells and calls by approximately 6,000 contracts each, buying the wells and selling the calls.
The bear spread trades suggest someone is betting that these big technology stocks are falling, or hedging their long portfolios against a possible decline in the indexes.
Technical Breakdown
From a technical point of view, a further decline in the QQQ ETF appears possible. The ETF has broken a significant upward trend that has been going on since early April. That uptrend broke for the first time on September 8; Breaking that uptrend could indicate a significant trend change for the index. Should the ETF break that support level around USD 265, it could cause the ETF to fall to around USD 250, up an additional 7%.
Now that the ETF and NASDAQ 100 index have fallen so much, it seems hard to imagine any lower leg remaining. However, with valuations for many of these stocks still at very high levels, and the index up dramatically from its low, another leg lower is probably more reasonable than it looks.
Disclaimer: Michael Kramer and Mott Capital's clients own AAPL and MSFT
