Unexpected things often don't happen when you are deliberately looking for them. This might explain why, despite soaring interest rates and market doubts about the AI sector, tech stocks have still remained strong. In the options market, traders' preparedness for a pullback has reached its highest level since early summer.
On Thursday, the Nasdaq 100 index fell by 1.8% at one point. Previously, the Financial Times reported that the revenue of OpenAI, the owner of ChatGPT, did not meet expectations. According to Barchart data, as the index declined, the ratio of outstanding put option contracts related to Invesco QQQ Trust (Invesco QQQ Trust) to call options rose to 1.49, the highest since the last week of June.
This indicator is not due to a single-day anomaly: although the stock prices of large tech companies have been steadily rising and hitting new record highs before Tuesday, since August, this ratio has been moving in a direction favorable to bearish options. On Wednesday, the two largest option trades of the day—one on Deutsche Bank’s SPDR S&P 500 ETF trust ( SPY ) and the other on Meta Platforms ( META )—were both bearish. In short, option traders have been increasing their protective positions in case of a market pullback, whether triggered by rising interest rates or cracks in the AI narrative.
However, it is not easy to interpret the signals sent by the options market at the current node. On one hand, the accumulation of hedging positions reflected by the QQQ bear/bull ratio means that once the market declines and the hedging positions turn profitable, selling may find support. One issue is that similar ratios for Deutsche Bank’s SPDR S&P 500 ETF Trust ( SPY ) and the S&P 500 index ( SPX ) are still close to average levels.
Moreover, despite the increase in the number of put options on QQQ on Thursday, the largest volume of trading on that day was actually on the upside.
At 11 a.m. Eastern Time, the largest trade of the day was the sale of nearly 5,000 put options with an expiration date in March 2027 and an exercise price of 740, for a amount of 15 million US dollars. The out-of-the-money range for these put options was less than 8 US dollars, which means that this trade would only be profitable if the index remained stable or rose. Subsequently, at 2 p.m., someone bought 6,500 call options with the same expiration date in March 2027 and an exercise price of 835—this was the largest option purchase of the day for ETF, worth over 8 million US dollars, and it would only be profitable if the index rose by 14%.
The above occurred during regular trading hours. However, during the after-hours period, market sentiment reversed.
Just after 4 p.m., someone bought 15,000 put options with an expiration date of January 15, 2027, and an exercise price of 680, costing 16 million US dollars; at the same time, they sold an equal number of call options with an expiration date of October 16, 2026, and an exercise price of 760, earning 4 million US dollars. In total, 20 million US dollars in premium was exchanged. This was a clearly bearish bet and also the largest transaction in terms of premium volume for that day.
Even for professionals, such a layout is perplexing.
"Neither the bond market nor that report regarding the revenue of OpenAI caused much disruption," said Don Kaufman, former head of ThinkOrSwim Trader Group and co-founder of TheoTrade. He held a position at ThinkOrSwim Trader Group for 15 years. "The market can decline, but for there to be a more sustained sell-off, there would need to be sufficient selling pressure to turn a market that can absorb downward pressure into one that will experience accelerated declines."
