Earnings Blowups Have Tech Investors Seeking Options Hedges

  • Ratio of Nasdaq VIX to S&P 500 gauge near highest since August
  • Apple, Amazon and Facebook set to report earnings this week

Tech traders who just lived through their worst week since February, with company after company plunging on earnings shortfalls, are taking steps to insulate themselves from a repeat.

Precautions underway in the options market have pushed a Chicago Board Options Exchange gauge of hedging costs in the Nasdaq 100 Index to the highest since August versus a similar measure for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Technology stocks in the S&P 500 slipped 2 percent last week, the most in almost three months, as Microsoft Inc. and Google parent Alphabet Inc. missed profit estimates.

Computer and software companies have been among the weakest segments of the market since earnings season began two weeks ago, falling almost 1 percent even as industries such as banks and oil drillers climbed more than 6 percent. Nasdaq 100 members have beaten analyst profit forecasts by 1.4 percent, just one-third the rate of the full S&P 500.

Among megacaps, Apple Inc. is scheduled to report results later today, with Amazon.com Inc. and Facebook Inc. following later in the week. The three account for 22 percent of the Nasdaq 100 by weighting.

“The fact that it’s such a top-heavy index definitely adds to the likelihood of volatility,” said Steve Sosnick, an equity risk manager at Timber Hill, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. “That’s especially true when the most highly weighted stocks are the ones with the biggest moves, which has been the case lately.”

Microsoft, with the second-biggest share of the Nasdaq 100 behind Apple, slipped 7.2 percent on Friday, the most since January 2015, after the company’s earnings report suggested progress made in its corporate turnaround took a step backward. Alphabet lost 5.4 percent the same day after saying margins could be pressured by higher mobile phone use and growth in automated ads.

The dual declines dragged the Nasdaq 100 lower by 1.5 percent on Friday, even though roughly half of the companies in the index rose on the day. The negative effect wasn’t enough to push the S&P 500 into the red. It finished the session little changed.

Apple, whose shares are down 3.6 percent since the start of reporting season, warned investors in January that revenue would drop for the first time in more than a decade amid slowing iPhone sales. Shares of the world’s most valuable company have fallen 19 percent in the past 12 months amid mounting investor concern that customers are upgrading their phones less regularly.

With the Nasdaq VIX climbing in five of the last six days for a 7.7 percent increase, its S&P 500 counterpart has traded below 20 for 40 straight days, the longest such streak in 13 months. The ratio of the two gauges sit 13 percent above its seven-year average, even amid record inflows to funds that profit from increases in the S&P VIX. The Nasdaq measure climbed 0.3 percent at 4 p.m. in New York.

To Sosnick, it should be part of normal practice for investors heavily invested in huge stocks like Apple and Facebook to be protected heading into quarterly results.

“People who trade these big-cap tech names ignore earnings at their own peril,” he said. “They know to be as hedged as heavily as possible before earnings.”

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