Is the risk of a tech stock bubble rising in the US market? Bank of America: The Nasdaq 100’s gains are overly reliant on a handful of AI giants, opportunities can be captured through options.
Bank of America suggests that investors who are concerned about both missing out on the Nasdaq 100’s record highs and the potential bubble risk in major tech stocks can consider using equity derivatives to participate in the rally, rather than holding the related stocks directly, in order to limit potential losses in the event of a sudden market reversal.
Zhitong Finance APP has learned that Bank of America stated investors who worry about missing out on the record-breaking rally of the Nasdaq 100 Index, while also concerned about potential bubbles in large-cap tech stocks, can consider participating in the upside through equity derivatives instead of directly holding the relevant stocks, in order to limit potential losses from sudden market reversals.
Recently, the tech-heavy Nasdaq 100 Index has continued to reach new all-time highs despite sharply rising U.S. Treasury yields. However, Bank of America pointed out that the current rally is mainly driven by a handful of large AI-related tech stocks, and the narrow market breadth has made investors focus on whether tech stocks are showing bubble characteristics.
Bank of America strategists Arjun Goyal, Riddhi Prasad, and Benjamin Bowler said in a report published on Tuesday: "Low market breadth is a typical feature during the formation of a bubble, and this situation usually persists until the bubble bursts."
For those worried about missing out on the trend and thus underperforming investors who have heavily allocated to the Nasdaq 100 Index, Bank of America believes that compared to direct stock purchases, options may be a more efficient way to participate. The bank continues to favor a bull call spread strategy on the Invesco QQQ Trust ETF (QQQ.US) tracking the Nasdaq 100, considering it a way to capture potential upside gains while limiting risk exposure.
Bank of America also said investors can collect premiums by selling protective options against declines in the Nasdaq 100 Index and use this income to fund bullish option positions. However, such strategies involve selling downside protection and may carry additional risks during sharp market falls, so they are more suitable for investors capable of managing complex option positions.
Bank of America has ranked the degree of bubble formation across 32 asset classes and industries. According to the bank’s “Bubble Risk Indicator,” U.S. tech stocks are currently in the highest bubble risk category. In addition, oil, healthcare, and the Korean stock market also rank near the top of the list. The Korean stock market is heavily influenced by the two major tech companies, SK Hynix and Samsung Electronics.
For more sophisticated traders, Bank of America also suggested that more complex option strategies can be constructed with dealers, and if the Nasdaq 100 Index continues to rise alongside further increases in rates, the related products can generate returns.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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