In recent days, the Nasdaq-100 has experienced significant profit taking as numerous investors have decided to reduce their exposure to what is known as the “Magnificent Seven.” This trend has led to a decrease in the value of the Nasdaq-100, which is closely followed by the Invesco QQQ Trust ETF. As we navigate through the earnings reports of the “Magnificent Seven,” volatility and turmoil in the Nasdaq are expected to continue, prompting more sellers to offload tech stocks. In this article, we will delve into the recent events surrounding the Nasdaq-100 and explore an options strategy that could potentially capitalize on a further decline in the tech sector.
Recent Developments
Following a series of recent month lows in companies such as Nvidia, Meta Platforms, and Alphabet, the Nasdaq-100, dominated by tech stocks, attempted to stage a comeback only to falter towards the end of the trading day. Meanwhile, other indices such as the Russell 2000 and the Dow Industrials saw slight gains. The Nasdaq’s failed rebound came on the heels of its worst day in almost a year and a half, with the QQQ closing down over 3.5%. This downward spiral was initiated by Alphabet’s 5% dip post its Q2 earnings report and exacerbated by Tesla’s 12.3% plunge, marking its worst day since 2020.
While the current state of earnings may be nebulous, it is clear that investors who have profited from the AI wave are eager to cash in on their gains. Companies like Nvidia have seen their stock prices surge by 130% year-to-date, leading many to wonder how much further the tech sector can decline. It is my belief that the current momentum will drive the QQQs down to its 200-day moving average of $426. To take advantage of this potential downward trend, an options strategy has been devised.
One possible strategy to capitalize on the anticipated decline in the Nasdaq-100 is a put spread. By purchasing the August regular expiration 8/16/2024 $455 put for $7.50 and simultaneously selling the August regular expiration 8/16/2024 $425 put for $1.65, investors can create a debit spread that costs $5.85 per one lot spread. This trade was executed when the QQQ was trading around $460. In the event that the market rebounds and the Nasdaq-100 begins to rally, the risk is limited, and the premium paid for the options can be viewed as an insurance policy that was not utilized. However, if the Nasdaq continues to decline as anticipated, investors stand to profit from the difference between the amount paid for the spread and the $30 wide spread.
The recent profit-taking in the Nasdaq-100 and the tech sector as a whole has raised concerns among investors regarding the future performance of these companies. While the market outlook may seem uncertain, there are opportunities to profit from potential downturns through strategic options trading. By carefully analyzing the current market trends and anticipating future movements, investors can position themselves to benefit from changing market conditions. It is essential to stay informed, remain vigilant, and adapt investment strategies accordingly to navigate through volatile market environments successfully.
All opinions expressed in this article are solely those of the author and do not necessarily reflect the views of CNBC, NBC UNIVERSAL, or their affiliates. This content is provided for informational purposes only and should not be construed as financial, investment, tax, or legal advice. Individual circumstances may vary, and readers are advised to seek personalized advice from a qualified financial advisor before making any investment decisions.