Each Magnificent Seven company that has reported earnings — every one but Nvidia — moved further afterward than options markets had priced in, a pattern last seen around ChatGPT's release, according to Bank of America. The bank's equity derivatives strategists tie the swing to stock dispersion at its highest level in nearly 35 years and point to hedges in healthcare and the S&P 500.
Each of the Magnificent Seven companies except Nvidia, which has not yet reported results, posted a post-earnings move bigger than options markets had priced in ahead of time — a pattern the group hasn't repeated since ChatGPT's release sparked an artificial-intelligence buying spree, Bank of America equity derivatives strategists said.
Tesla dives as Microsoft surges
The gap showed up starkly in single-stock moves. Tesla stock dove 15% after its results. Microsoft shares climbed 16% over the same stretch.
Dispersion hits a 35-year high
Those earnings swings combined with two other shocks: the collapse of hedge fund Situational Awareness and the uncertainty stemming from a press conference held by new Fed Chair Kevin Warsh. Together, the three drove U.S. stock dispersion to its highest level in nearly 35 years, Bank of America calculations show.
Bank of America strategists said tech-bubble buildups can overcome such headwinds and uncertainty over the longer term. According to Bank of America: "shorter-term drawdowns and rotations into value are not unusual," the strategists said.
Hedging healthcare and the S&P 500
To navigate the rotation, the strategists point to call spreads on the healthcare sector that could offer up to $4 for every dollar invested, limiting the downside compared with buying the underlying stocks in a sector the strategists view as overbought. A call option gives the buyer the right to purchase a share at a set price within a set time, and a call spread pairs a bought call with a sold call at a higher strike to lower the trade's upfront cost.
Healthcare ranks highest of all sectors on Bank of America's bubble risk indicator, which combines an asset's returns, volatility, momentum and fragility.
The strategists also flagged put spreads and put-spread-collar trades that could benefit from a grind-lower in the S&P 500, citing today's rotation-prone market and steep put skew. A put option lets the holder sell the underlying asset at a set price by a specific time.
Source: MarketWatch
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