Despite the Magnificent Seven making record highs, the AI trade is showing signs of cracks. Concerns over OpenAI’s revenue growth have hit neocloud stocks, and chips are selling off Tuesday on concerns about Chinese competition.
Add the Fed’s first rate hike since 2023 in September, with another expected right behind it, and the tech-heavy index has plenty working against it.
Those pressures are real, but options traders have been bracing for bigger swings than the Nasdaq has delivered in recent weeks.
QQQ’s implied volatility index (IVx), a measure of how much movement options traders are pricing in, closed Monday near 20.7%. That puts Nasdaq-100 volatility on par with small caps. The Russell 2000 typically carries a higher IVx than the Nasdaq-100, but right now QQQ and the iShares Russell 2000 ETF (IWM) are essentially tied near 20.7%, while the SPDR S&P 500 ETF (SPY) sits at 15%. And for 29 straight sessions, QQQ’s IVx has sat at least three points above the volatility the index actually delivered.
In other words, every day since the start of September, options have priced in bigger moves than QQQ ended up making. This week’s selling has yet to close that gap.
That gap is the opportunity.
When the market dips but moves less than options expect, selling premium into the weakness lets traders collect elevated prices while setting strikes below a market that’s already come in.
The trade
Based on Monday’s close, I’m selling the November 13 720/710 put spread for a credit of roughly $1.81.
This is a bullish-to-neutral trade, in line with how QQQ has traded this fall. Even after this week’s dip, QQQ is up about 5% since the start of September and hit a record just a week ago. The trade doesn’t need the pullback to reverse, just to stay contained through November 13, or until it’s managed. It reaches its maximum profit of $181 as long as QQQ stays above $720 through November 13. The $720 short put sits below the 50-day moving average, near $726, and the $710 long put sits just below the market’s expected move, near $713. With a breakeven of $718.19, about 3.7% below Monday’s close, the trade leaves room for a further pullback through earnings season.
The choice for the November 13 weekly was made to avoid Nvidia’s earnings report, expected around November 18. QQQ’s options are liquid enough that its weeklies can be considered for this trade.
The maximum loss of $819 is reached if QQQ closes below $710, roughly 4.8% lower, by expiration. The credit is a bit light, but that’s the trade-off for a wider cushion: the trade carries a 70% theoretical probability of profit and an 80% theoretical chance of collecting half the max profit. If QQQ finishes between $710 and $720 at expiration, the short put can be assigned and result in an obligation to buy 100 shares per spread at $720. After the credit, the effective cost basis is $718.19, about 5.5% below the record high. QQQ last closed below $720 on September 17. Because of that exposure, consider closing or rolling the trade before expiration rather than holding it into settlement.
The biggest risks are on the calendar: CPI on Wednesday, bank and Taiwan Semiconductor earnings this week, and Microsoft and Alphabet reporting alongside the Fed decision on Oct. 28.
The Nasdaq is under pressure, but it has yet to outrun what options are pricing. This trade sells into that weakness and leaves room for it to run a little further.
Disclosures: Spina owns this trade.
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