The options market has been buzzing over the last two weeks as traders have started to position themselves for a larger shift in stock prices.
Historically, monitoring activity in the options market gives you a different perspective from what you might read or see in the financial media. Options traders often react to the market conditions more quickly as they move to protect their portfolios or speculate on large price shifts.
That’s the case over the last two weeks, but the data is suggesting that there is more pain to be felt over the next few months.
One of the simplest sentiment indicators out there is the CBOE equity put/call ratio. This ratio is exactly what the name suggests, the number of puts traded on the CBOE divided by calls. Reading above 1.0 indicate that there are more puts being traded than calls, a sign of extreme investor fear.
On Tuesday, the CBOE Equity Put/Call Ratio posted a reading of 0.57. That means that there were 57 puts traded for every 100 calls, far from the fearful levels needed to signal a buying opportunity for stocks.
At the market bottom in January, the reading hit 0.98. last April’s bottom for the market saw readings above 1.0.
The 0.57 reading of the put/call ratio indicates that there is more pain to follow for stocks.
Despite the bearish reading of the put/call ratio, there were several stocks and ETFs that did see some excessive put activity as more savvy traders are preparing to profit from deeper cuts to stock prices.
These are the top 10 stocks and ETFs that options traders added puts to on Tuesday.
Notable on the list is the addition of puts to the S&P 500, Russell 2000 and Nasdaq 100 ETFs.
Option traders are building a firewall of puts between their portfolios and lower prices.
Tuesday’s activity saw put open interest on the Nasdaq 100 ETF (QQQ) increase a whopping 470,072 contracts for all of the ETF’s expiration cycles. A lot of that options activity occurred in the shorter-term daily and weekly expiration, but the March 21 monthly expiration options give us an idea of the price targets that options traders are eyeing over the next few weeks.
The chart below shows the distribution of call and put open interest for this expiration date.
Note the increased activity at the $470 and $440 strikes for the QQQ, these two prices are turning into the options market’s target prices for the tech heavy index over the next two weeks.
Note that Tuesday’s prices on the QQQ drew a bottom at the $472 price, just short of a dip to the building activity of the $470 strike. The changes in open interest identify that this is one of the prices options traders are building that protective firewall at as they fear lower prices.
Given that, the $470 price has turned into a critical price level for the QQQ to hold.
The $440 price is the next price that is being identified as a critical price from the recent options activity. In short, this is the second price that options traders are concerned about the QQQ trading to over the short-term.
That would constitute an 8% drop from current prices.
April option expiration is starting to look like the March expiration in terms of where options traders are positioning for the QQQ to head. Lower prices and a target of $440 remain the position, meaning that investors should prepare accordingly.
I’m not a fan of trying to “time” these moves with short-term expiration options as they are part of a larger trend. This means that I don’t mind paying higher prices for options with more time premium, like the June 20, 2025 expiration QQQ puts that currently have 100 days until they expire.
The additional time allows for the market’s clear trend to play in to your hands.
In this case, the $470 strike is slightly out of the money, giving me the advantage of seeing a little more leverage in the returns as the options go into the money towards my target price of $440.
The June 20, 2025 QQQ $470 put is currently trading for $1,890 a contract.
Using theoretical options pricing, if the QQQ hits the $440 price at any time in the first 50 days of holding this option, its value will be a minimum of $3,568 or a return of 88%.
Investors considering a strategy like this need to draw lines where the trade would be closed in case the Nasdaq 100 does move into a rally that is more than the expected “Dead Cat Bounce”.
In this case, I identify three daily closes above the Nasdaq 100 (QQQ) 200-day moving average as a logical stop-loss for the hedge position.
Of course, I need to point out that options trading carries significant risk and is not suitable for all investors. Prior to trading, ensure you understand the risks involved and consult an independent financial advisor.
