How Long for the Tech Bull Run?

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,

With the recovery in the QQQ ETF over the past week — which 100% led the S&P 500 higher — many tech stocks charts look A LOT better.

So, is Apple (Ticker: AAPL) going to 140?

Is Microsoft (Ticker: MSFT) going to 300?

What’s next for Amazon (Ticker: AMZN)?

I actually think we’re a touch toppy now.

Let me show you what I’m looking at. Below is a chart of CBOE Nasdaq Volatility Index (Ticker: VXN) minus Nasdaq-100 Volatility Index (Ticker: VOLQ):

VXN is the VIX of the NASDAQ 100 (Ticker: NDX) and QQQ …

And VXN methodology looks at the entirety of options with 30 days to expire as long as they have a bid of at least .05. This means VXN is looking at strikes ranging from 8,000 all the way up to 17,000 in the NDX.

VOLQ, on the other hand, only looks at-the-money options.

So when I compare the two I get a really clear picture of how expensive out-of-the-money options are.

Let me tell you, OTM options, namely puts, relative to at-the-money options are really inexpensive.

This means there is little demand for puts and calls.

When skew gets depressed like it is now — currently the second-lowest level of the year — that is a sign that things are getting toppy.

We might be due for a day or two of pull back because there is no hedging going at the moment and NDX is sitting right at an all time high:

We are going to see a move lower, back to 13,500, or so before the market makes a decision where it needs to go.

A move like that should produce some put demand and get skew going.

My Play

With the way things are currently priced, strangles in QQQ are almost certainly too cheap.

I would be a buyer of the May 325-345 strangle for a little over $10 — I think that price is going to go higher.

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian

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