NEW YORK (Reuters) – Options investors are raising the stakes on some of this year’s biggest winners, including Amazon.com Inc (AMZN.O), Netflix Inc (NFLX.O) and Tesla Inc (TSLA.O), even as they become cautious on the general market amid a coronavirus outbreak in the United States.
The Netflix, Tesla and Amazon logos are seen in this combined photo. REUTERS / Lucy Nicholson / Thilo Schmuelgen
Investors are betting that tech-related stocks will remain relatively resilient to the coronavirus-fueled economic shocks that have plagued sectors such as retail and travel, despite growing concerns about extended valuations after strong concentrations.
Analysts also see another factor that drives momentum actions: fear of getting lost, or FOMO.
The rocket-like surge in such stocks has boosted year-to-date earnings for the S&P 500 .SPLRCT technology, the discretionary communications services sectors .SPLRCD and .SPLRCL discretionary for the consumer, although the benchmark S&P 500 .SPX broader is still negative for the year. Amazon is a component of the consumer discretionary index, and Netflix is a component of the communication services index.
“The flight to safety is in technology,” said Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets. “These tend to be the names that are isolated from the fact that they are all quarantined.”
Fears of new economic consequences of the coronavirus increased Monday when California reinstated restrictions on businesses and the state’s two largest public school districts announced that instruction would be online only when classes resume. The tech-heavy Nasdaq switched between profit and loss on Tuesday, the day after falling 2.1%, its highest loss percentage in more than two weeks.
But buying bullish call options in tech-related names has not been affected. For example, demand for call options versus bearish put options, a measure called bias, at Tesla is currently near historical extremes, even after the stock has risen more than 300% from its March lows. Tesla’s 30-day bias is negative, at -15.2%, according to Trade Alert, meaning that call prices have exceeded those of equivalent put options.
The tilt on Amazon, Netflix, Twitter and other momentum has also been negative in the past week. In contrast, the bias in the S&P 500 shows an increasing bias towards put.
“It has an almost perfect storm,” said Matt Amberson, director of options analysis firm ORATS. “There is a bit of institutional concern, but retailers (investors) … are optimistic.”
Still, there are many concerns about technology stocks. Fund managers in a recent survey by BofA Global Research said buying tech stocks was the “busiest” trade in the market for the third consecutive month.
Furthermore, some strategists believe that the sharp rise could make technology-related stocks more vulnerable if the growth prospects of companies do not meet investor expectations. The second-quarter earnings season started in earnest on Tuesday when several major US banks reported results.
After the recent recovery, many technology-related stocks have “the kind of valuation in which they would like to make a profit,” said Oliver Pursche, president of Bronson Meadows Capital Management.
In fact, the future price-benefit ratio for the S&P 500, at 22.1, according to Refinitiv, is at its highest level since the dotcom boom two decades ago.
Some investors have opted to bet on stocks that are outside the technology sector but that can position themselves to benefit from an incipient economic recovery. Skew has immersed itself in several companies considered among the biggest beneficiaries of an economic recovery, including Boeing Co (PROHIBITION) and Delta Air Lines (DAL.N)
Other recent call buyers include investors who want to expose themselves to potential gains but are hesitant to buy stocks at current prices, said Christopher Murphy, co-director of derivatives strategy at Susquehanna Financial Group, a trend he said has occurred in tech-related names. , such as Tesla and Shopify Inc (SHOP.TO) (SHOP.N)
“We are seeing a FOMO phenomenon being valued,” he said.
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