US tech stocks rebound after the crash, traders remain cautious

According to the Zhitong Finance and Economics APP, the recent rebound of US technology stocks has not convinced options traders.

Although US technology stocks have been leading the market rally since the crash earlier this month, the cost of hedging against the volatility of the Nasdaq 100 index contracts remains high compared to the S&P 500 index contracts.

Cost of hedging technology stock volatility remains high

Since the end of last year, most technology stocks have risen, driving the S&P 500 index to new highs repeatedly. The reason is that people optimistically believe that the progress of artificial intelligence will fundamentally change the world, and company profits will continue to grow. However, later on, people became worried that in a high-interest rate and soft economic data environment, the rise of technology stocks was too rapid. The S&P 500 index fell 8.5% from its high in July to its low in early August, turning the big winners in technology stocks into big losers.

Although the S&P 500 index has recovered three-quarters of its decline, traders remain cautious as the earnings season is still ongoing. Profits of technology companies are slowing down, and investors are increasingly focusing on the returns of artificial intelligence investments.

Irene Tunkel, Chief US Stock Strategist at BCA Research, said about large-cap stocks: "People are getting a bit nervous. The issues won't disappear. We expect to see more volatility ahead."

After months of calm, the selling earlier this month pushed the Volatility Index (VIX) to nearly a four-year high, and the three-month implied volatility of the Nasdaq 100 index ETF reached its highest level since June 2022 relative to the S&P 500 index fund. Subsequently, the volatility has eased, but indicators tracking the volatility of the Nasdaq 100 index remain above the annual average level before the Jackson Hole Symposium and Nvidia (NVDA.US) earnings release on August 28.

Daniel Kirsch, Options Director at Piper Sandler, said: "Differences in returns may also scare investors, and the top-heavy nature of the technology ETF suggests that option prices will be higher."

Over the past year, the average difference in the three-month implied volatility between the Invesco QQQ Trust Series 1 tracking the Nasdaq 100 index and the SPDR S&P 500 ETF Trust has been 4.9 points, now it is 5.6 points.

The uncertainty in the next 10 days will of course be Nvidia's earnings report, and investors will closely watch CEO Jensen Huang's outlook. While Nvidia is expected to continue to generate substantial profits, it is currently unclear whether artificial intelligence investments will bring huge profit breakthroughs for other companies.

Nvidia has risen by over 150% year-to-date, and the cost of hedging against downside risks has increased relative to the days before the previous earnings report, but has decreased from the highs earlier this month The cost of hedging Nvidia's downside risk has increased compared to the previous financial quarter.

Steve Sosnick, Chief Strategist at Interactive Brokers, said: "This implies risk aversion. If before the last financial report was released, people were more concerned about missing out on a rebound, now they are more concerned about a decline."