The AI trade, despite the Magnificent Seven reaching record highs, is showing signs of weakness as concerns over OpenAI's revenue growth have negatively impacted neocloud stocks, and chip stocks are selling off due to worries about Chinese competition. Additionally, the Federal Reserve implemented its first rate hike since 2023 in September, with another hike expected soon, adding further pressure to the tech-heavy index [1].
Options traders have been anticipating larger swings in the Nasdaq-100 than have actually occurred. QQQ's implied volatility index (IVx) closed Monday near 20.7%, matching the Russell 2000's IVx, which is unusual since the Russell 2000 typically has higher volatility. In contrast, the SPDR S&P 500 ETF (SPY) sits at 15%. For 29 consecutive sessions, QQQ's IVx has remained at least three points above the realized volatility, indicating that options have consistently priced in bigger moves than QQQ has delivered since the start of September [1].
This discrepancy presents an opportunity for traders. By selling premium into market weakness, traders can collect elevated option prices while setting strike prices below the current market level. The recommended trade is to sell the November 13 720/710 put spread on QQQ for a credit of approximately $1.81. This bullish-to-neutral strategy aligns with QQQ's performance this fall, as the ETF is up about 5% since early September and recently hit a record high. The trade achieves maximum profit if QQQ stays above $720 through November 13, with a breakeven at $718.19, about 3.7% below Monday's close. The maximum loss of $819 occurs if QQQ closes below $710 at expiration, with a 70% theoretical probability of profit and an 80% chance of collecting half the max profit [1].
The timing of the trade avoids Nvidia's earnings report, expected around November 18, and leverages the liquidity of QQQ's weekly options. The strategy is designed to benefit from the current environment where implied volatility remains elevated relative to realized volatility, even as the market faces headwinds from rate hikes and sector-specific concerns [1].
CONCLUSION
The AI trade is under pressure from macroeconomic and sector-specific factors, but options market dynamics present a tactical opportunity. Traders can potentially profit by selling premium, capitalizing on the elevated implied volatility relative to realized moves. The recommended put spread offers a defined risk-reward profile amid ongoing market uncertainty.