JPMorgan says buy puts in flagging momentum stocks like Tesla

Published Tue, Jun 1 20211:46 PM EDTUpdated Tue, Jun 1 20211:53 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Growth stocks saw their shares surge last year, but have hit a slowdown — which means options traders may have an opportunity to make money, according to JPMorgan. "The correlation of Growth and Momentum is broken, driven by a swift market re-allocation towards Value amid a view the economic reopening will drive inflation and interest rates higher, headwinds for stocks that benefit in deflationary environments such as Technology," the firm said in a note to clients. That breakdown means some of the previous high flyers could see downside volatility in the months ahead, JPMorgan said. The firm identified stocks that had breached at least three of five technical signals, including the 50-day and 100-day moving averages. "While our U.S. equity strategist remains Overweight Technology, downside risks could remain for those stocks triggering negative momentum signals despite the NASDAQ 100 in a recent upswing. We screen the NASDAQ 100 for stocks that are breaking, or are poised to break, below key momentum/technical signals that also carry cheap implied volatility for tactical trade ideas," the note said. The stocks on the list include Baidu and Skyworks — which have hit all five marks — and Tesla and Okta , which have crossed four. To take advantage of these trading patterns, JPMorgan derivatives strategist Shawn Quigg recommended buying July puts on the stocks at strike prices that are 95% of the current trading price. Puts are options that give the holder the right to sell the stock at a given price at some point in the future. In this case, if one of the stocks fall more than 5%, the put option would let the trader sell it for an above-market price. If the stock falls by a smaller amount or rises, the options trader is only on the hook for the premium paid to purchase the puts. The four stocks mentioned above outperformed the broader market in 2020, with Okta surging more than 100% and Tesla surging more than 700%. However, only Skyworks has seen its shares rise year to date. The semiconductor stock is up more than 11% in 2021, but it has fallen roughly 15% from its recent peak in April. —CNBC's Michael Bloom contributed to this report.

A Tesla supercharger station photographed on January 4, 2021 in Hawthorne, California.

PATRICK T. FALLON | AFP | Getty Images

Growth stocks saw their shares surge last year, but have hit a slowdown — which means options traders may have an opportunity to make money, according to JPMorgan.

"The correlation of Growth and Momentum is broken, driven by a swift market re-allocation towards Value amid a view the economic reopening will drive inflation and interest rates higher, headwinds for stocks that benefit in deflationary environments such as Technology," the firm said in a note to clients.

That breakdown means some of the previous high flyers could see downside volatility in the months ahead, JPMorgan said.

The firm identified stocks that had breached at least three of five technical signals, including the 50-day and 100-day moving averages.