QQQ Crash Protection Premium Hits Election-Era Highs

The PowerShares QQQ Trust (QQQ) skidded lower to start the month of July, deepening a pullback from its June 9 intraday peak of $143.90. And while QQQ's decline in the early innings of last week was rapid, it certainly didn't approach "official correction" territory -- the fund won't be 10% off its peak intraday or closing highs unless it drops below $130 -- and the shares appeared to rebound from their 80-day moving average late in the week. Nevertheless, the cost of "crash protection" on QQQ vaulted to new year-to-date highs.

We're talking here about the 10-day moving average of QQQ's put/call skew on 10% out-of-the-money options. As displayed by the red line on the accompanying chart, this metric -- which compares implied volatility (IV) readings for out-of-the-money puts against that of their call counterparts -- jumped as high as 1.789 last week. This was the loftiest such reading since Nov. 15, 2016, when the calculation was still figuring in pre-election hysteria levels.

This reading is based on a fairly robust sample, too, with QQQ options attracting plenty of attention so far this summer. As of Friday morning, put open interest on QQQ stood at 5.2 million contracts -- in the 99th percentile of its annual range, per Trade-Alert, and not too far removed from the June 30 annual high of 5.5 million. QQQ call options are near a similar popularity peak in their own right, with open interest of 2.3 million contracts registering in the 98th annual percentile.

As far as the actionable trading signals that can be derived from this extreme divergence in QQQ put and call IV levels, we'd note that this isn't necessarily a screaming "sell premium" indicator. In fact, both Schaeffer's Volatility Index (SVI) -- a measure of front-month IVs -- and a rolling 30-day at-the-money IV skew reading for QQQ are planted squarely near the middle of their respective annual ranges. What's more, as of midday on Friday, 30-day at-the-money IV on QQQ was at 16.0% -- in the high 91st percentile of its annual range, but a modest discount to the fund's 30-day historical volatility of 17.4%.

So the recent peak in QQQ's 10-day, 10% out-of-the-money put/call skew may be most useful right now as a sentiment indicator -- one that reveals traders are bidding up the odds of a QQQ crash over a continued rally to record highs by the widest margin in eight months, even as the shares remain (by any objective account) on strong technical footing above their 80-day.