The recent sell-off in the Nasdaq-100, driven by profit-taking and disappointing earnings reports from the “Magnificent Seven” tech giants, has raised concerns among investors. The volatility and carnage in the tech sector are likely to continue, leading to more downward pressure on tech stocks.
Despite a brief attempt at a comeback, the Nasdaq-100 failed to sustain its momentum and finished in the red, while other indices like the Russell 2000 and the Dow Industrials edged higher. The sell-off was triggered by Alphabet’s disappointing earnings report, followed by losses in Tesla. With tech stocks like Nvidia up 130% year to date, investors are becoming increasingly cautious.
To profit from the expected plunge in the Nasdaq-100, one strategy is to implement a put spread. This involves buying the August regular expiration 8/16/2024 $455 put for $7.50 and selling the August regular expiration 8/16/2024 $425 put for $1.65. The total cost of this debit spread would be $5.85 per one lot spread. By defining the risk in this trade, investors can potentially benefit from a further decline in the Nasdaq.
If the market bulls intervene and the Nasdaq-100 stages a recovery, the risk in the put spread is limited to the premium paid. However, if the Nasdaq continues to drop as anticipated, the profits from this spread would be the difference between the strike prices minus the initial cost of the spread.
The Nasdaq-100 is facing increased selling pressure due to the recent earnings disappointments and profit-taking by investors. Implementing an options strategy like a put spread can be a way to profit from the expected further decline in the tech sector while managing the associated risks. It is important for investors to carefully consider their own financial circumstances and seek advice from a financial advisor before making any investment decisions.