over 2 years ago • 1 min
Ark Investment Management’s flagship Ark Innovation exchange-traded fund (ticker ARKK) is due for a pull-back and investors can use options to profit at its expense, according to a report last week from JPMorgan.
The ETF – whose top holdings include carmaker Tesla, payment provider Square, and videoconferencing service Zoom – has climbed 17% since mid May as declining bond yields made unprofitable tech stocks more attractive. The fund’s still down 6% this year, however, after a huge 149% surge in 2020.
The yield on 10-year US government bonds (a.k.a Treasuries) has dropped to 1.29% from 1.69% over the past two months. When the returns available on safe investments like Treasuries fall, it makes the promised future profits of companies like Tesla and Zoom that much more attractive. JPMorgan, however, argues that the drop in Treasury yields will prove short-lived – creating an opportunity to bet against the Ark Innovation ETF using options.
The investment bank recommends you buy put options on ARKK expiring in October with a strike price of $105, 10% below Friday’s closing price. (The price of the options is charted in blue above).
Put options allow the holder to sell the underlying stock at the strike price. So the trade will prove profitable if the share price (charted in pink) drops below that $105 strike price (shown as a green horizontal line) before the options expire on October 15th. If the share price remains above $105, the options will expire worthless – and you’ll lose any money you paid to buy them.
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