With the main tech index (QQQ) up more than 43% from the April lows, I want to highlight that 2-month (October) put skew is now just below the 3-year highs. This attractive put skew is likely a function of both VIX moving back to the YTD lows, while there remains a bid for “tail hedges” (perhaps due to the lasting memory of the April tariff-related selloff?). Regardless of why put skew is this wide, I believe with the market up this much in such a short period of time, and all the talk regarding concentration at the top (Mag 7), this skew should be considered when establishing protective hedges at this time.
QQQ 2-month (Oct) 10-delta/40-delta put skew is at a 3-year high (bottom chart)
When looking specifically at the October 10-delta/40-delta put skew, I see that lines up approximately with the 570 strikes and the 515 strikes. Coincidentally, that 515 put strike also happens to be to current 200-day moving average for QQQ (and ~ 10.8% below where QQQ closed on Friday). I believe that should we see a pullback in tech that is more than just a shallow one, then the 200-day would be a likely level of support. It also happens to be just above the level where the market gapped higher in May once the tariff deadlines were extended out. In addition, I also looked at the last three (non-tariff related) significant declines for QQQ in the last 18 months, and the average decline was ~ 12.5%. If, in fact, the high that was put in last week in QQQ ~ 583 were to be a short-term “top”, that 515 level also happens to be ~ 12% lower.
QQQ is up more than 43% from the lows. The last three (non-tariff) declines averaged a 12.5 move lower. The 200-day is 12% below the highs hit last week
While put skew for SPY is also very attractive, I prefer to look at establishing QQQ hedges using the skew since tech has far outpaced the overall market off the April lows, and should we see a decent pullback from here I believe tech would have to be leading market lower (especially given the ever-increasing weighting in the index). In addition, the QQQ/SPY relative spread just moved up by nearly 8% off the April lows to the recent highs. We saw a very similar move in that relative spread last April thru July, only to see it reverse the entire move shortly after as QQQ underperformed SPY by ~ 7% from July ’24 thru early Aug ’24. Therefore, I prefer to focus on QQQ hedges currently if considering a way to protect the sharp gains from April over the next few months.
The QQQ/SPY relative spread gained nearly 8% off the lows. This move looks a lot like the April ’24 – July ’24 move (which then reversed as QQQ led both lower)
With put skew this attractive not only do I prefer put spreads, but I believe ratio puts spreads (where you oversell that “expensive” tail put) make a lot of sense at this time. I am less in the camp that we see a significant drop/pullback from here, and believe that should we see a decline it would be in the more “typical” 5-15% range (which supports using the ratio spread trade).
Here are 2 trades to consider using that 515 level (10d) put as part of a ratio hedge trade that I wanted to highlight:
Trade #1 – QQQ Oct 1×2 put spread
Buy QQQ Oct 570 puts 1x (39d, 17.2 vol)
Sell QQQ Oct 515 puts 2x (11d, 24.5 vol)
Costs ~ $5.35 (QQQ 577.34 Fri close ref)
> Buying the Oct 1×2 ratio put spread as a tech hedge following 43% rally off the April lows and sharp outperformance by QQQ to SPY
> The 10d/40d put skew is at 3-year highs (why ratio spreads make sense)
> Trade has short delta (17d), is long vol (Vega), long gamma and starts off with positive carry (theta)
> Selling the 515 puts 2x (at the 200-day) covers ~ 55% of the cost of the puts that are less than 1% lower
> Trade makes money between ~ 565 and 465 (-2% to -20%) by October expiry
> Hedge doesn’t cap further upside and effectively paying less than 1% of the underlying QQQ to hedge against a decent pullback for the next 2 months
The GREEN area highlights where the 1×2 ratio put spread is profitable at Oct expiry. The max profit would be at the 200-day moving average ~ 515
Trade #2 – QQQ Oct 2×3 ratio put spread
Buy QQQ Oct 570 puts 1x (39d, 17.2 vol)
Sell QQQ Oct 515 puts 1.5x (11d, 24.5 vol)
Costs ~ $6.95 (QQQ 577.34 Fri close ref)
> Buying the Oct 2×3 ratio put spread as a tech hedge following 43% rally off the April lows and sharp outperformance by QQQ to SPY
> The 10d/40d put skew is at 3-year highs (why ratio spreads make sense)
> Trade has short delta (23d), is long vol (Vega), long gamma and starts off exactly theta neutral
> Selling the 515 puts 1.5x (at the 200-day) covers ~ 41% of the cost of the puts that are less than 1% lower
> Trade makes money between 563 and 400 (-2.5% to -37%) by October expiry – the 400 level was also the dead lows back in April
> Hedge doesn’t cap further upside and effectively paying just over 1% of the underlying QQQ to hedge against decent pullback for the next 2 months
The GREEN area shows where the 1×1.5 ratio put spread is profitable at Oct expiry. Max profit also at the 200-day ~ 515 and makes $$ all the way down to the April lows
Please reach out to me or the 22V sales team for updated pricing and execution capabilities for either structure.
