Traders are betting that tech giants will crush earnings season

Getty Images

Bill Gates and Jeff Bezos.

• A crucial stretch of tech earnings is coming up, with Amazon, Google, Microsoft, Facebook and Apple set to report.
• Despite shares sitting near record highs, traders are surprisingly light on downside hedges.

With tech stocks already trading near record highs, you'd think traders would be piling into hedges. You know, to protect against losses in the event of disappointing earnings... just in case.

Complimentary Tech Event

Transform talent with learning that works

Capability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More

Think again.

Rather than play it safe, investors are electing to enter a crucial period of tech earnings relatively unhedged. The upcoming stretch includes reports for Amazon, Google and Microsoft on October 26, followed by Facebook and Apple the following week.

The lack of downside protection being purchased is surprising when you consider how fully-valued the stock market looks to be, particularly from a tech perspective. The tech-heavy Nasdaq 100 index is up 25% year-to-date, having hit a new record last week, while its price-earnings ratio is the highest since the dotcom bubble.

It's possible that traders are simply so bullish on the prospect of strong tech earnings that they don't want to dilute their potential upside by paying for hedges that end up being unnecessary. After all, mega-cap tech stocks have made a habit out of spiking after strong earnings reports.

Traders are paying the lowest premium in almost five months to protect against a 10% decline in the PowerShares QQQ Trust ETF, relative to wagers on a 10% increase, according to data compiled by Bloomberg. That's a bullish signal for the fund, which tracks the Nasdaq 100 and is one of the most heavily traded ETFs in the US market.

Business Insider / Joe Ciolli, data from Bloomberg

Traders are paying the lowest premium since early June to protect against a big drop in a tech-heavy ETF, relative to bets on a large gain.

A similar unhedged dynamic is in play in the SPDR Technology Select Sector ETF, which tracks technology companies in the S&P 500 index. The ratio of put contracts - frequently bought as a hedge against share losses - to bullish calls is the lowest since February, another bullish sign for tech stocks.

Business Insider / Joe Ciolli, data from Bloomberg

The put-call ratio of an ETF tracking the S&P 500 Tech Index is the lowest since February.

To help you prepare for the tech-heavy portion of earnings season, here's a rundown of the recent stock performance for the companies set to report:

• Amazon (October 26) - year-t0-date return: +30%
• Google (October 26) - YTD return: +25%
• Microsoft (October 26) - YTD return: +27%
• Facebook (November 1) - YTD return: +49%
• Apple (November 2) - YTD return: +36%