Active traders and investors navigating the technology sector are increasingly focusing on options market data to assess risk sentiment and position themselves for potential price moves, according to a report distributed via NEWMEDIAWIRE. The report, authored by Jim Wyckoff of Benzinga, highlights how studying options price action, volume and open interest can provide valuable insight into near-term price direction for the popular and volatile tech sector, particularly as the artificial intelligence race drives demand for compute power.
At the center of this analysis are Nasdaq-100 Index Options (NDX) and Nasdaq-100 Micro Index Options (XND), which allow traders and investors to trade or hedge the performance of the Nasdaq-100 Index. While both track the same top 100 non-financial companies listed on Nasdaq, they differ primarily in contract size and affordability. The XND tracks the Nasdaq-100 Micro Index, fixed at 1/100th of the full NDX value, with a $100 multiplier. With the micro index trading around 290, one contract controls $29,000 in notional exposure, making XND very accessible for retail traders.
According to the report, studying the put/call ratio (PCR) of NDX and XND can reveal a bullish or bearish bias toward the indexes at a given time. A high PCR ratio, with more puts than calls, suggests trader anxiety and a bearish bias, while a low PCR shows keener risk appetite and a more bullish stance. Some experienced traders also use the PCR as a contrarian indicator, viewing extreme readings as warnings of upcoming price or trend reversals.
Implied volatility is another critical gauge. During periods of higher market volatility, options premiums can increase substantially. The report notes that NDX and XND recently showed a significant surge in implied volatility leading up to second-quarter big high-tech earnings reports, with a sharp divergence between the technology sector and the broader S&P 500. This divergence stemmed from concerns that U.S. artificial intelligence models had monetization bloat compared to rival models from China. “Investors rushed into NDX and XND options for portfolio protection, creating notable volatility spikes,” according to a Seeking Alpha report cited in the content. The heightened implied volatility peaked in late July, forcing the more general-market Volatility Index (VIX) to rise.
The report also examines options “skew,” which refers to pricing differences between out-of-the-money puts and calls. A steep skew, where out-of-the-money put premiums and implied volatility rise faster than those of call options, suggests keener risk aversion and a more bearish sentiment. Conversely, flat skew indicates relatively equal implied volatility and premiums across strike prices. Monitoring skew in the Nasdaq options arena is important given that tech sector stocks have become more popular and more volatile over the past couple of years.
Open interest at individual strike prices can also signal targets. Higher clusters of call options at a certain strike imply upside price targets or technical resistance levels, while clusters of puts suggest downside targets or key technical support levels. Volume surges in NDX and XND reflect more aggressive directional trades or institutional hedging via puts, suggesting the “smart money” is sensing caution even if the underlying index is trending up. Rising open interest amid a rallying Nasdaq index is a bullish signal of investor conviction and heavier backing for the uptrend.
The report further notes the Cboe-Nasdaq 100 Volatility Index (VXN), a real-time indicator measuring expected 30-day volatility for the Nasdaq-100 Index. The VXN’s keener focus on the tech sector gives traders a better reading on sentiment for that sector compared to the VIX, which measures overall market risk. The VXN trades at a higher numerical value than the VIX because the Nasdaq-100 contains more growth-oriented, potentially more volatile stocks than the more diverse S&P 500. Rising VXN readings suggest increasing anxiety among tech stock traders, while declining readings indicate a calmer sector and even some complacency.
Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options, which may be obtained from a broker, one of the exchanges or The Options Clearing Corporation, or by calling 1-888-OPTIONS or visiting visitwww.888options.com. The content was originally published on Benzinga. A featured image was provided by Shutterstock.
