Investors wary of owning technology megacaps driving the Nasdaq 100 Index to record highs can still capture the rally using equity derivatives and avoid the fallout from a potential bubble, according to strategists at Bank of America Corp.
While the tech-heavy index storms higher, shrugging off soaring bond yields, the benchmark’s ascent is propelled by just a handful of AI-related names, raising concerns that tech stocks are exhibiting bubble-like characteristics.
“Low breadth is a classic feature of bubbles building and typically doesn’t stop until they pop,” strategists including Arjun Goyal, Riddhi Prasad and Benjamin Bowler write in a note on Tuesday.
For investors worried about missing out and underperforming peers fully invested in the Nasdaq 100, options are a more efficient tool than owning the underlying stock, they said. They recommend call options on Invesco QQQ Trust ETF (QQQ), which tracks the Nasdaq 100.
“We continue to like QQQ call spreads as an attractive, risk-limited upside expression,” they write.
Bullish options bets, which benefit from the rising price of the underlying asset, can be funded by the premium gained through selling insurance on a drop in the Nasdaq 100, they said.
Bank of America ranks 32 asset classes and sectors by how frothy they are. “US tech stocks... currently rank with the highest [Bubble Risk Indicator] reading,” according to BofA.
Other asset classes at the top of the list include oil, healthcare and South Korean stocks, a market dominated by two tech companies, SK Hynix Inc. and Samsung Electronics Co Ltd.
More sophisticated traders could enter into exotic options with dealers that pay out if the Nasdaq 100 rises as rates continue to rise, the BofA strategist added.