Investors are parting with some of the biggest winners of the bull market, concerned the stocks will fall just as fast as they rose.
The iShares Nasdaq Biotechnology ETF capped the biggest two-day drop since 2011 after soaring more than 50 percent in the past year. Among 10 options with the highest ownership, seven represent bets the fund will fall. Netflix Inc. (NFLX) shares are down 15 percent in March, pushing the cost of bearish options to a two-year high. Put trading yesterday in a Nasdaq 100 Index exchange-traded fund was 33 percent above average.
Evidence of a slowdown in U.S. manufacturing and predictions for a Russian recession triggered a stock-market retreat yesterday, with gauges of health-care providers, small companies and Internet shares losing more than 1 percent. The industries are among the best performers of the bull market.
“The great winners who have had a great run tend to get hit hardest as you pull back,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said yesterday in a phone interview. “A gradual deterioration in a fairly orderly way is healthy for the markets. When they truly plummet, that’s when you get the sense that investors are unnerved.”
Stocks are making halting progress after a five-year advance. The Standard & Poor’s 500 Index (SPX) has fluctuated within a 50-point range over the past month and risen less than 1 percent for the year.
Economic data and forecasts from analysts yesterday signaled slower global growth. China’s manufacturing industry probably weakened for a fifth month in March, according to a preliminary measure from HSBC Holdings Plc and Markit Economics, and a U.S. factory gauge also declined. Russia, the world’s ninth-biggest economy, will shrink for at least two quarters as penalties for annexing Crimea rattle markets, according to state-run VTB Capital.
The Nasdaq Biotechnology Index (IBB) has fallen 12 percent since a record in February, meeting the common definition for a correction. Options on an ETF tracking the gauge are the most expensive ever relative to the S&P 500, a sign of rising demand for insurance against further declines.
Implied volatility for the biotechnology ETF is 33.9, compared with 13.4 for an S&P 500 ETF, according to data on one-month contracts closest to the stock compiled by Bloomberg.
Netflix, Alexion Pharmaceuticals Inc., Facebook Inc. and Tesla Motors Inc. slumped at least 3.8 percent yesterday, helping lead declines in the Nasdaq 100 Index. The four companies have gained an average of 20 percent in 2014.
More than 330,000 puts on the PowerShares QQQ Trust, an ETF linked to the Nasdaq 100, changed hands yesterday, data compiled by Bloomberg show. That compares with a daily average of 256,000 contracts from the past 20 days.
The Chicago Board Options Exchange Volatility Index of S&P 500 options prices fell 6.5 percent to 14.11 at 9:38 a.m. in New York today, while the S&P 500 rebounded 0.6 percent to 1,869.42. Europe’s VStoxx Index slipped 7.1 percent to 18.04 in London.
While the 298 percent rally in Netflix last year may seem extreme, it’s justified because the company’s business is growing and faces little competition, according to Whitney Tilson, the managing partner at Kase Capital Management. Earnings at the Los Gatos, California-based company increased sixfold in 2013 and will probably double in 2014, according to analysts’ estimates compiled by Bloomberg.
“It’s a highly volatile stock,” Tilson said in a March 21 interview. He oversees about $70 million for Kase Capital in New York. “I own it because I’m looking out five or ten years.”
Netflix trades at 158 times reported profit, making it one of the most expensive stocks in the Nasdaq 100, data compiled by Bloomberg show. The median company in the benchmark has a price-earnings ratio of 25.
Puts protecting against a 10 percent decline in Netflix shares cost 5.7 points more than calls betting on a 10 percent rally, according to one-month implied volatility data compiled by Bloomberg. The price relationship climbed to 6.4 on March 18, the most since June 2012.
Among the 10 most-owned contracts, seven were puts. January 2015 $125 puts, January 2015 $45 puts and June 2014 $375 puts had the largest open interest among the bearish options, the data show. Netflix slid 6.7 percent to $378.90 yesterday.
Joris Evers, a company spokesman, didn’t return a phone call seeking comment on the options trading.
These stocks “are valued on their growth more so than traditional valuation metrics,” Max Breier, a senior equity-derivatives trader at BMO Capital Markets Corp. in New York, said in a March 24 phone interview. “When that comes into question, they tend to be the first ones to get hit.”
To contact the reporter on this story: Joseph Ciolli in New York at firstname.lastname@example.org