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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 12 June 2017 at 13:08 GMT

Volatility Update: Temperature rises in tech-heavy Nasdaq

Product Manager, Options Trader, Educator
Denmark
  • US technology stocks got hit hard on Friday
  • The selloff saw Nasdaq volatility spike over 30%
  • Nasdaq futures (NQ) point to lower opening
  • VIX pointing higher in pre-market, approaching $12, or 10% above Friday's close
  • CME FedWatch shows a 96% probability of a US rate rise on Wednesday


New York Stock Exchange
 The New York Stock Exchange. Tech stocks took 
a beating on Friday. Photo: Shutterstock


By Georgio Stoev

US technology stocks got whacked in the second half of Friday's trading session. While the tech-heavy Nasdaq lost 1.8%, broader indices, such as the Russell 2000, registered gains. The RUT (Russell 2000) had a great run and advanced 1.8% for the week, most of it coming on Thursday and Friday.

So what sparked the selloff among the tech giants? A few things, including a Goldman Sachs report that suggested an increased risk of owning FAAMG (Facebook, Apple, Amazon, Microsoft and Google) stocks. That was the match that ignited a fire, at least for the mega-cap names. In these stocks, we saw some $100 billion in value wiped away in one day. 

Nasdaq 100 future (NQM7) 
NQM7
Source: Saxo Bank

Options users extended to options to hedge or speculate on the move. Among the most active option issues for the day were those of Apple and Nvidia. 

According to TradeAlert LLC, 1.1 million Apple option contracts were traded on Friday, which is 250% of its average volume. To break it down further, there were 691,834 calls against 470,507 puts, or a put-to-call ratio of 0.68. Naturally, 63% of the calls were with lower delta 0-40 as risk reversals took place. The biggest trade of the day was a block of 7,500 21 July 17 160 calls, which was part of a buy/write deal.

For the week we saw lumber trading higher as negotiations between the US and Canada over a trade dispute intensified. The underlying contract for July delivery (LBN7) has been on a steady uptrend for the last two weeks and could continue to edge higher. 

Overall it was a quiet week for rates and currencies ahead of this Wednesday's Federal Open Market Committee meeting, which is expected to raise rates.
Weekly performance
 Source: QuikStrike

A US rate hike is already baked in, with the CME FedWatch showing a 96% probability of a rate rise on June 14. All eyes now focus on the rest of the year. Despite the indication for more rate hikes, bonds are trading at disconnect or shrugging off all of this. Perhaps if equities weaken further, we could see a flight to safety lift bond prices further. 

We will provide trade views on the 10-year US Treasury and/or EURUSD (6E) tomorrow. At the time of writing, the yield on the 10-year note continues lower at 126'16. Today's trade idea, however, outlined Friday night, is a long position in RBOB gasoline. (For details click here.)

The CBOE volatility index (VIX) had a relatively quiet session on Friday. In fact, the VIX got down low before spiking back up. Clouds are swiftly settling in, however. The VIX is pointing higher in pre-market dealing and approaching the $12 handle, or 10% higher than Friday's close. VIX futures (VXM7) are also trading up at $12.05, with nine days to expiration. The spread between the cash index and the futures, however, is narrowing.

With pressure on equities to persist in the next couple of days, we will likely see some sector rotation, for instance moving out of tech stocks and into utilities and healthcare. We recently purchased an outright call on Pfizer, which you can read about here.

Have a great week.


— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank

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