Technology shares continued their bumpy ride through the week of June 16 with the Technology Select Sector SPDR (NYSEARCA:XLK) down nearly 1.5 percent. Despite the fact that there has been a rise in volatility, shares of the XLK are still up 14.25 percent for the year and the best sector in the market. The semiconductors (NASDAQ:SOXX) are performing better but could be viewed as a sub-group within Tech.
Among the top names in the XLK ETF, the heaviest hit this week were Apple (NASDAQ:AAPL), down 4.5 percent; Applied Materials (NASDAQ:AMAT), down 3.64 percent; and PayPal Holdings (NASDAQ:PYPL), down 2.92 percent.
The recent weakness among the tech heavyweights could be a bit of a concern considering the concentration these stock have as a weighting in the Nasdaq Composite. Apple, Alphabet (GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Facebook (NASDAQ:FB) are the top 5 companies in the Nasdaq composite. The trading in these five stocks could heavily weigh on how the rest of the index trades.
When looking at the options market on each of these stocks, we can use the combined total put and call open interest as an indication of the number of "bets" being placed on the future direction of the movement of the stock's underlying price.
With Apple's stock closing on Friday, June 16 at a price of $142.27, we can see the majority of the open interest in Apple is placed at a level near or below Apple's closing price. With a very significant drop-off occurring at the $165 strike price. There is considerable open interest in Apple down to the $105 strike price going out to January of 2018.
Alphabet closed at $958.75 on the 16th; again, we can see the skew seems to be slightly more lopsided to lower level strike prices. The shorter-dated options for July expiration seem to appear to be more evenly distributed (it is circled in orange). The even distribution could indicate that the options market is not anticipating a sharp move in Alphabet's price in either direction.
Shares of Microsoft closed on Friday at $70. We can see that most of the open interest drops off sharply before the $77.5 strike prices, indicating again that most bets are being placed on lower level strike prices. This suggests the market may be anticipating a decline in shares of Microsoft.
By this measure, Amazon more closely resembles Alphabet than that of Apple or Microsoft, but with the concentration of the bets for short-dated July expiration occurring around the stock's closing of $987 or lower. Indicating that traders are not anticipating a sharp rise in Amazon's share price soon.
Shares of Facebook closed on the 16th at $150.64. Interesting here, the shorter date July options seems to be weighted above the stock's closing price on Friday. This could be an indication that the options market is expecting shares of Facebook to rise in the near term.
We can infer from all these open interest charts, for now, that the market is placing more bearish bets on the value of Apple, Alphabet, Microsoft, and Amazon in the short-to-medium term significantly. The bets seem to be getting placed for the shares staying neutral to moving lower. The one exception is Facebook, where it looks like the skew is for the stock price to move higher.
Short Interest for only Amazon and Apple have risen over the past couple of weeks.
The Technology sector has recently seen a spike volatility with the sector having another rough week. For now, Apple, Alphabet, Microsoft, and Amazon, appear to be having neutral to bearish bets placed on them by the count of total put and call open interest. Facebook seems to be the only stock that has a positive skew. If that is the case, and the options market is correct, it could, therefore, continue to put some negative pressures on the overall Nasdaq Composite, since these five stocks have the heaviest weighting within the index.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
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