Why Tech Stocks Are Set to Explode This Week

This week we have one of the most stacked lineups of the year with big tech earnings (MSFT/AMD/META/AMZN/AAPL) on Tues/Weds/Thurs parked on both sides of the main event (FOMC) on Weds. This is setting tech stocks up for an explosive move this week. Let’s dive into the key reasons why – and how to position yourself for maximum profit.

Big Tech Sells Off

Over the last two weeks, QQQ's as well as SPY's sold off heavily, losing 7% and 3% respectively. One of the main drivers of this was the overleveraged tech/AI space with QQQ's up 19% on the year and the big daddy in the tech index up +163% heading into the July op-ex (monthly option expiry).

Leverage is a double sided blade meaning that it will be a big reason why you climb so high, but also a big reason you fall so heavily. Tech/AI/semi's were all in the same boat – overleveraged, hence the big sell off.

We predicted this in our Benzinga Option School weekly report suggesting these uber-long call tickers were setup for a pullback come the July op-ex.

What we've seen since then is a big deleveraging of those long call/bullish bets, with traders also cutting back shares.

Now that we've seen some ‘normalizing' of the positioning, we think tech is in a place where it can either a) rip higher with strong earnings or b) sell off further if the earnings don't dress to impress.

In either scenario, the FOMC has to play ball (dovish/rate cut for bullish moves, hawkish/no rate cut for bearish action).

Volatility Premium

When you trade options, you're not just trading direction. You're also trading time and volatility as those are two input variables which affect the pricing of options. We think the volatility premium (which has been climbing as the big tech players have sold off) offers a reason why tech could explode higher. 

When volatility increases, if the markets give us strong earnings + a supportive FOMC, that volatility premium has to come down. This not only gives Vanna/hedging effects which provide a tailwind to the tickers, but also gives traders a reason to sell volatility via short puts.

If you know that the ticker is supported at a particular level you think will hold, you can sell puts to take advantage of the fact the volatility premium will come down, thus providing a profit contour even if the stock price goes nowhere. We think traders will want to sell that volatility if the earnings + FOMC are bullish this week, giving additional reasons why the market could rip higher.

At the same time, volatility is not ‘over-priced', so if the FOMC + earnings are bearish, we think there's plenty of room to go, which would support a bearish move. 

In either scenario, volatility will be a strong input variable for a potentially explosive move this week.

How to Trade It?

We'll be giving specific trade ideas to our Benzinga Option School & Trading Wave members Tuesday or Weds during our special FOMC class at 2pm EST as we'll be covering the FOMC statement release and press conference.

But to give you some hints, if you think the market will be bullish, we recommend buying bull call spreads OTM (out of the money) for the Aug 16 op-ex as we think this week will be a major driver for the upcoming month. On the flip side, if you think the FOMC/earnings will disappoint, we suggest doing the inverse, buying a bear put spread targeting deeper OTM strikes for the same Aug op-ex.

Strikes that stand out to us are 470 and 500 for the upside in QQQ's, and 450 for the downside. Overall we prefer trading QQQ's this week over SPY's as we think there is going to be a more volatile reaction towards the earnings/FOMC in the tech index, thus providing a unique trading opportunity.

If you want more of my Short-Term Options Trade ideas you can find them Here

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