JPMorgan: Your Safe Stocks Might Not Be Bulletproof

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JPMorgan analysts believe tech stocks too big to fail are at serious risk.

JPMorgan analysts believe tech stocks too big to fail are at serious risk, according to Business Insider.

The coronavirus pandemic has benefited stocks like Apple, Amazon, Alphabet, and Facebook. Work from home policies and other COVID induced social changes helped big tech rake in massive gains in the second quarter.

Low-interest rates have also forced investors to invest in riskier equities in hopes of greater returns.

With massive gains, a smart investor would look for ways to hedge. A JPMorgan team lead by the head of machine-learning strategies, Peng Cheng came up with two hedging strategies.

The team determined that there are two main risks.

· Higher interest rates are a concern because they have an inverse relationship with tech stocks. Momentum stocks lose their foundation compared to value stocks when interest rates increase and reconfigure multiples that show how much they are willing to pay for riskier assets.

· The second risk involves Donald Trump’s poll numbers improving before the election. Cheng believes that investors have priced in a Biden win and that a Trump win could surprise them.

Cheng recommends these two trades to help hedge against potential tech losses.

  1. Resettable put contracts on the PowerShares QQQ ETF.

"We propose selling 1x 6M ATM put to buy 1.55x 6M 87.5% resettable puts on QQQ, for zero premium," Cheng said. "The resettable puts will reset its strike 5% higher for every 5% higher in spot, observed at monthly frequency, with no cap on resets."

He continued, "The structure begins its life as a 1x1.55x put ratio (long 1.55x OTM puts), and will turn into a 1.55x1 put spread (long 1.55x near the money puts) if the QQQ rallies by more than 15% in six months."

  1. Buy a bear-risk reversal on Apple shares

Apple shares have surged this year and just underwent a 4-1 split. The options market believes the rally will continue. A bear-risk reversal uses a put and call option to help investors hedge risk on either event.

"We recommend investors purchase AAPL November 540c/440p bear risk reversals for a net credit of $10.25, indicatively ($500.04 reference price), taking advantage of the stock's rich implied volatility, flat skew and significant overshoot in relation to our 2021 fundamental price target," Cheng said.

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