Worries about a repeat of the April crash in U.S. tech stocks as options traders rush to buy "catastrophic" put options

According to the Zhitong Finance APP, after U.S. President Trump announced a massive increase in tariffs on trade partners in early April, leading to a sharp decline in U.S. stocks, the Nasdaq 100 index, primarily composed of technology stocks, has rebounded nearly 40%. This rebound is mainly attributed to the strong performance of large tech stocks, with the "Magnificent Seven" index, including NVIDIA (NVDA.US), Meta (META.US), and Microsoft (MSFT.US), soaring nearly 50% since hitting a low on April 8.

However, the strong rebound in tech stocks masks underlying dangers lurking beneath the surface of the market. Some potential triggers for a downturn are about to emerge—from the Jackson Hole Global Central Bank Annual Meeting starting in a few days to NVIDIA's earnings report set to be released next week. Therefore, options traders are increasingly worried about a potential crash in tech stocks in the coming weeks and are rushing to buy "insurance" to protect themselves from a collapse.

Jeff Jacobson, head of derivatives strategy at 22V Research Group, stated that traders "are not too worried about a typical, common pullback"; they seem more concerned about a repeat of the sell-off in April. However, he personally believes that a shallower decline is more likely.

Jeff Jacobson noted that traders are purchasing "disaster puts" on the Invesco QQQ Trust Series 1 ETF, which tracks the Nasdaq 100 index. Put options give investors the right to sell the underlying securities at a specific price and are typically used as a tool to hedge against market declines. He mentioned that the indicator used to measure the cost difference between hedging against a deep crash and a minor decline is nearing its highest level in three years.

Torsten Slok, chief economist at Apollo Management, wrote in a report to clients on Monday that as the performance of tech stocks is "strikingly similar" to the internet bubble of the late 1990s, concerns about a bubble in the market are intensifying. Meanwhile, Michael Hartnett, chief investment strategist at Bank of America, has been warning since last December that risk assets are forming a bubble and predicts that U.S. stocks will decline after the Jackson Hole central bank meeting ends this Friday.

Jeff Jacobson stated, "The market has gone through a significant rally. Too many factors could lead to a decline in large tech stocks." For example, concerns about the impact of artificial intelligence on software companies have already caused Salesforce (CRM.US) to see its stock price drop 27% year-to-date. If inflation driven by tariffs prevents the Federal Reserve from cutting interest rates significantly as the market has anticipated, the upward momentum of the "Magnificent Seven" could also come to a halt.

Jeff Jacobson pointed out, "There may be a shift of funds out of the 'Magnificent Seven' into previously lagging sectors, and there could even be a 'sell the news' situation when NVIDIA announces its earnings, or we might see a 'sell the news' scenario after the Jackson Hole central bank meeting." He added that the currently high options skew indicates that traders are hedging against the risk of a repeat of the "tariff panic" in April. However, he believes this concern is exaggerated. Although the Nasdaq 100 index fell more than 20% from its peak on February 9 to its low on April 8, such a magnitude of movement is extremely rare. Over the past 18 months, the average pullback of the Nasdaq 100 has been about 12.5%.

Nevertheless, Jeff Jacobson is pessimistic about the short-term outlook for large tech stocks. He stated, "Clearly, this possibility exists. The concentration of these stocks is just too high, and it doesn't take much of a trigger for a decline to occur."