{"id":89884,"date":"2024-02-22T21:32:10","date_gmt":"2024-02-23T02:32:10","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=89884"},"modified":"2024-02-22T21:32:13","modified_gmt":"2024-02-23T02:32:13","slug":"bullish-bets-on-nvidia-other-magnificent-seven-members-near-their-most-crowded-levels-in-the-past-year","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=89884","title":{"rendered":"Bullish bets on Nvidia, other \u2018Magnificent Seven\u2019 members near their most crowded levels in the past year"},"content":{"rendered":"
Bets on risky bullish options tied to members of the \u201cMagnificent Seven\u201d and other market-leading technology stocks are nearing their most crowded levels in the past year, according to data from market-data firm Spotgamma. <\/p>\n
This is prompting some derivatives-market experts to warn that the broader equities market could be at risk of a pullback as Big Tech stocks, which have led the market higher over the past year, could falter following Friday\u2019s options expiration. <\/p>\n
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According to data from Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, the one-month and three-month call skew for Nvidia Corp. \n NVDA, \n +16.40%<\/bg-quote> \n has reached the highest level since at least June. <\/p>\n
Call skew measures demand for riskier out-of-the-money calls relative to at-the-money bullish bets. When skew rises, it means demand for riskier options is climbing relative to demand for options that would pay off if the stock were to see a smaller advance before expiration. <\/p>\n
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According to Silverman, however, the simple fact that relative demand for out-of-the-money calls has reached extreme levels compared with recent history doesn\u2019t necessarily portend an immediate reversal in the underlying stock.<\/p>\n
While it suggests that Nvidia is trading almost entirely on momentum, \u201cmomentum tends to beget momentum,\u201d Silverman said in a research note shared with MarketWatch. <\/p>\n
Nvidia is the best-performing stock in the S&P 500 so far in 2024, having gained 46.7% this year on top of its 238% advance in 2023. Its shares were trading at $726 around midday Tuesday as the broader market sank following the release of January inflation data that came in slightly hotter than economists had expected. <\/p>\n
Others said that extreme demand for bullish options could create problems not only for members of the Magnificent Seven, but also other semiconductor stocks like Arm Holdings Plc \n ARM, \n +4.17%<\/bg-quote>,<\/span> \n which has seen its shares rocket higher by more than 60% year-to-date \u2014 and perhaps for the broader market. <\/p>\n
Skew for calls tied to Arm shares on Monday touched its 98th percentile over the past year, according to data provided by Spotgamma. Skew for calls tied to Amazon.com Inc. \n AMZN, \n +3.55%<\/bg-quote> \n was even higher, having reached the 99th percentile over the past year, while Meta Platforms Inc.\u2019s \n META, \n +3.87%<\/bg-quote> \n call skew was also in its 98th percentile.<\/p>\n
The Magnificent Seven includes shares of Nvidia, Amazon and Meta, as well as Microsoft Corp. \n MSFT, \n +2.35%<\/bg-quote>,<\/span> \n Alphabet Inc. \n GOOGL, \n +1.08%<\/bg-quote><\/p>\n
GOOG, \n +1.03%<\/bg-quote>,<\/span> \n Tesla Inc. \n TSLA, \n +1.36%<\/bg-quote> \n and Apple Inc. \n AAPL, \n +1.12%<\/bg-quote>\n <\/p>\n
Charlie McElligott, a derivatives-market strategist at Nomura, has been saying for months now that rising demand for out-of-the-money call options represents investors\u2019 \u201cfear of missing out\u201d on further upside. <\/p>\n
In effect, investors are paying a premium to ensure their portfolios will benefit from any further gains for individual megacap technology stocks, as well as indexes like the S&P 500 and Nasdaq Composite.<\/p>\n
The biggest drawback to this type of upside hedging is it creates an environment where activity in the options market could influence trading in underlying stocks, potentially creating a dangerous feedback loop. <\/p>\n
Brent Kochuba, founder of Spotgamma, said in a note to clients dated Monday that this Friday\u2019s expiration of monthly options tied to single-stock names, indexes and exchange-traded funds could precipitate a correction in stocks \u2014 with the S&P 500 potentially retreating to the 4,900 level or below. <\/p>\n
\u201cThe bullish tech trade is very crowded,\u201d Kochuba said in the note.<\/p>\n
Heavy demand for bullish options forces options dealers, who are selling calls to traders, to hedge their positions by buying stocks, pushing the market higher. This is where the feedback loop comes into play, as higher stocks draw more long-call demand, which draws more hedge-buying from dealers.<\/p>\n
Wednesday\u2019s expiration of options linked to futures of the Cboe Volatility Index \n VIX,<\/span> \n better known as the Vix or the market\u2019s \u201cfear gauge,\u201d could also become a potential catalyst for the next move lower in the markets, McElligott and Kochuba said.<\/p>\n
In options parlance, being \u201cin the money\u201d means an option can be exercised or sold for a profit. \u201cAt the money\u201d describes an option with a strike price close to or at where the underlying asset is currently trading. \u201cOut of the money\u201d means an option with a strike price that\u2019s higher, if it\u2019s a call, or lower, if it\u2019s a put, than where the underlying stock is trading. <\/p>\n
The Vix was at 14.90 in recent trading Tuesday, on track for its highest close of the year. <\/p>\n
Kochuba also noted that the heavy call skew for Nvidia could make it more difficult for the company\u2019s shares to rally after it reports earnings on Feb. 21, even if it surpasses Wall Street\u2019s expectations. <\/p>\n
He noted that the last two instances where Nvidia\u2019s call skew was at or near current levels occurred in November 2021 and June 2023, as investors awaited earnings from the chip maker. In both cases, the peak in skew for Nvidia coincided with market tops, including the Nasdaq Composite\u2019s record closing high from November 2021. <\/p>\n
U.S. stocks sold off on Tuesday following the January inflation report, with the S&P 500 \n SPX \n down 1.3% to 4,955 in recent trading, while the tech-heavy Nasdaq Composite \n COMP \n fell 1.7% to 15,679. <\/p>\n
The Dow Jones Industrial Average \n DJIA,<\/span> \n meanwhile, was off by 508 points, or 1.3%, to 38,286. <\/p>\n<\/p><\/div>\n