Stocks have thus far had a fantastic year, with the tech-heavy Invesco QQQ Trust up over 40% year-to-date. The explosive progress in artificial intelligence combined with a surprisingly resilient economy has driven this growth.
While the most likely path — along with momentum — is higher, there are numerous warning signs on the horizon.
The biggest concern is a Federal Reserve steadfast to bring interest rates down to its 2% target. These last few weeks have been telling, with the market now predicting higher rates for longer with an expected peak of over 5.5%. While the market quickly brushed it off, it is a concern because it means higher borrowing rates for companies while also increasing the attractiveness of bonds vs. stocks.
Artificial intelligence — while offering great opportunity — is also just in its infancy and it is unclear if the benefits will outweigh the drastic increases in stock valuations.
This uncertainty, combined with the continued threat of a recession, could spell a quick turnaround of tech stocks if data and sentiment sour. With volatility near multiyear lows, a put option on QQQ stock ETF can take advantage if stocks quickly turn south.
Little Put On QQQ Stock ETF Could Generate Big Gains
With QQQ trading around 373 on Wednesday, investors can buy a Sept. 15 expiry 330 put for $1.73. The cost of this put also equates to a maximum loss of $173 if QQQ remains above 330 on Sept. 15.
In the event that we see a sharp downturn in the indexes, the maximum profit on this trade can be massive, with returns of over 1,000% entirely possible.
However, it is important to note that with a delta of only 10, this put will most likely expire worthless. So it is better to view it as a cheap bet or a little bit of insurance against a worst-case scenario.
Despite the high probability this put expires worthless, investors do not need QQQ to fall to 330 to turn a profit. So long as a downturn happens quickly enough, investors can take profits early if they think there will be a bounce.
At the money volatility on QQQ for September is currently at its lowest level, touching 17.5% annualized, compared with realized volatility of 16% and 22% for the past 30 and 200 days, respectively.
Due to the high leverage that out-of-the-money options provide, investors should be comfortable with losing all the option premium before placing this trade.
QQQ stock ETF Wednesday climbed to the highest since January 2022 and has been trading above its 21-day exponential moving average.
