BofA Flags Tech Bubble Risk, Recommends QQQ Call Options to Capture Upside

Bank of America strategists said investors worried about holding the megacaps driving the Nasdaq 100 to record highs can still participate in the rally through equity derivatives while hedging against a potential bubble. In a research note published Tuesday, strategists Arjun Goyal, Riddhi Prasad and Benjamin Bowler wrote that the rally's concentration in a handful of stocks is "a typical feature of bubble formation," often persisting until the bubble bursts. They recommended buying call options on the Invesco QQQ Trust ETF (QQQ-US), calling a QQQ call spread an attractive way to participate in gains with limited risk. The cost of the bullish options position can be funded by selling downside protection on the Nasdaq 100 and collecting premiums, they added. BofA ranked 32 assets and sectors by bubble risk, finding U.S. tech stocks currently score highest. Oil, healthcare and South Korean equities — dominated by SK Hynix and Samsung Electronics — also ranked highly. More experienced investors could trade exotic options with dealers to profit if rates keep rising alongside the index, the strategists said.