March 20, 2018
by Bloomberg News
Ben Hider/Getty Images
(Bloomberg) — Rougher seas lie ahead for technology stocks, according to trading in the derivatives market.
The Cboe NDX Volatility Index, which measures the implied volatility of the Nasdaq 100 Index and goes by the symbol VXN, climbed for a second day on Tuesday — to as high as 23.51, compared with Friday’s close at 17.64. Meanwhile, the underlying gauge, which has a more than 60 percent weighting in technology stocks, pared some of Monday’s 2.2 percent decline.
The spread between the VXN index and the Cboe Volatility Index — a similar metric for the S&P 500 Index — is back to levels not seen since early February, before the explosion in the VIX and corresponding drop by the broad U.S. stock benchmark into correction territory.
But unlike previous tech-centric tumults, such as last June, the gap hasn’t really blown out in an extreme way. That’s a “good indication of the lack of panic” among investors, says Credit Suisse Group AG equity derivatives strategist Mandy Xu.
Investors may be convinced that any problems in the space are isolated to Facebook Inc. and its spate of negative news. Instead, they appear to be focusing on firm fundamentals for the sector, which is expected to post robust revenue growth. In fact, traders are using this selloff to position for upside in single-stock options in select tech names, she said.
Out-of-the-money options on the Nasdaq 100, however, speak to the lingering fear surrounding these longtime market leaders. The spread between implied volatility of one-month puts relative to that of calls is two standard deviations above its five-year average, showing heightened demand for the bearish options.
“If the FANG and Nasdaq leadership begin to fail, I’d expect VXN to hold more premium over VIX because Facebook, Amazon, Google, Apple and others have run so much without a real correction,” said Dave Roberts, a Washington, D.C.-based independent trader of volatility derivatives and associated products. “It’s possible QQQ/NDX put buyers start bidding higher, driving up VXN.”
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