Trade Update – $QQQ: Closing Oct Put Spread for Loss (yep a loss)

by Dan October 13, 2014 11:32 am • Commentary

Back in late July and early August we made a couple bearish trades against large cap tech stocks through QQQ puts.  Despite the thesis playing out now, it was a very poorly timed.  As of two weeks ago, the October put spread that we are long was a total loser with a very small probability of success.  The market’s quick retreat has very much put this trade back in play, but the risk reward of a big winner vs the trade being a total loser on an oversold market bounce back above $95 is not exactly equal.

Given that we have better risk/reward bearish trades on that we recently initiated closer to the highs, we are going to take off the QQQ put spread this morning at a small loss salvaging most of our premium after the trade looked like it would expire worthless just a few weeks ago.

One last note – AAPL makes up 14% of the QQQ, so the stock’s relative strength has been a big factor in holding QQQ above its 200 day ma even as the other major indices have breached that moving average today.  Since we already have a short AAPL trade on at the moment, it makes even more sense to take off the QQQ on today’s weakness.

Action: Sell to Close QQQ ($94) Oct 95/85 put spread at 1.60 for a .80 loss



Previous Post August 1st, 2014:  Trade Update w/ New trade- $QQQ Tipping Redux

Nearly three weeks ago, when the QQQ was $94.35, just a tad below current levels, we bought the Aug 94 puts (below) as we thought the growing divergences between the Nasdaq 100’s leadership and rank and file components would eventually be too much to bear.   The NDX’s declining breadth has not improved, mentioning as recently as this am:

we have noted what appeared to be a dramatically narrowing rally in the technology stocks, where the 5 largest components (AAPL, MSFT, GOOG/L, INTC & FB) make up about 35% of the weight of the Nasdaq 100 (QQQ).  Last Friday Enis highlighted  the heavy-lifting of a few mega-caps  As of July 18th, the Nasdaq 100 had the fewest % of components making new highs with the index at all time highs  (from Dana Lyons):

Screen Shot 2014-07-25 at 10.55.10 AM

With results of most mega-cap tech stocks out of the way, I would suggest that the Nasdaq 100 could be one of the most crowded trades that exists in U.S. equities as its fate lies with the success of Apple’s iPhone 6 (13.5% of the index).

After such a sharp decline like yesterday, we think it is important to pick the right spot to add to the position, and/or roll.  The ytd chart below shows the near test this morning of the QQQ’s 50 day moving avg, a level that the SPX sliced through yesterday:

QQQ ytd from Bloomberg
QQQ ytd from Bloomberg

If the index can not rally here and breaks below the 50 day, we would expect a re-test of the prior break-out level from early June, back near $92.  If things were to really get going on the downside, a re-test of the the double bottom low near $84 from February and April could be in the cards.

Despite yesterday’s more than 2% decline, and the subsequent vol spike, implied volatility (the price of options) in the QQQ remains relatively low considering the pick up in realized vol (how much the underlying is moving).  If realized were to reach levels similar to April and May, implied vol at current levels would be a very attractive buy:

QQQ 2yr chart of 30 day at the money Implied Vol (blue) vs Realized Vol (white) from Bloomberg
QQQ 2yr chart of 30 day at the money Implied Vol (blue) vs Realized Vol (white) from Bloomberg

The puts that we are long are still down a little bit from the point of purchase as a result of time decay, and we will look for one more big down down to close them out, but in the mean time we want to roll out a bit to give the thesis more time to play out.

Trade:  QQQ ($94.75) Bought Oct 95/85 Put Spread for 2.40

-Buy 1 Oct 95 Put for 3.00

-Sell 1 Oct 85 Put at .60

Break-Even on Oct Expiration:

Profits: btwn 92.60 and 85 make up to 7.60, max profit of 7.60 below 85

Losses: up to 2.40 btwn 92.60 and 95, max loss of 2.40 or 2.3% above 95

Rationale:  While implied volatility has picked up, it is still only in the middle of the 1 year range, despite the yesterday’s move lower.  The October put spread offers a nearly 4 to 1 risk/reward, with more than 2 months until expiration, which looks attractive given that the March/April selloff in QQQ took about 6 weeks. The key pivot area to watch is the breakout area of $91-$92.



Previous Post July 8th, 2014:  New Trade – $QQQ Tipping?

Yesterday we highlighted the extremely low levels of implied volatility in QQQ at a time where it appeared that the index was reaching fairly rare level of “overbought-ness” (see below).  Today’s price action, a continuation from yesterday’s decline, in high valuations stocks, leads us to believe that there could be more to come in the weeks ahead.  The low levels of implied volatility in almost every major US equity indices vs the slow grind higher to new highs was registering a level of complacency not seen in a very long time.  As we head into the start of Q2 earnings season we think there is a good chance that stocks that disappoint get punished, while stocks that meet or slightly beat are met with a more subdued enthusiasm with major indices near all time highs.

We missed our entry on the short side into yesterday’s close as we would have liked to seen an up opening this morning to lay out the short trade, but we will use this afternoon’s bounce off the lows to put on our trade.

New Trade: QQQ ($94.35) Bought to Open Aug 94 put for 1.35

Break-Even on August expiration:

Profits:  below 92.65 down 2%

Losses: btwn 92.65 and 94 lose up to 1.35 or about 1.5% of the underlying stock price.  Max loss of 1.35 above 94.


The market suddenly seems a little technically challenged. If this is true and we’re due for a pullback from recent highs the QQQs offer an inexpensive way to play with vol so low in the options. We’d likely spread this or take it off for a quick gain if the pullback follows through.




Previous post July 7th, 2014:  Name That Trade – Avenue $QQQ 

The Nasdaq has become very overbought over the past couple of weeks, though, as has been usual at various times over the past several years, many underlying divergences persist.  Tom McClellan noted one such divergence in a post at

The Nasdaq 100 Index is making new multi-year highs, levels not seen since the weeks just after the 2000 Internet Bubble top.  But it is interesting for us to see that the average component stock in that index is down 7% from its trailing 52-week high.

This current divergence is not guaranteed to stay with us.  It looks like a genuine divergence now, but it is still possible that we could see a continued rally that takes the stocks in the Nasdaq 100 collectively up closer to the level of their 52-week closing highs, thereby closing the gap on this measure of average drawdown.  But for now, the message is that the average stock making up the Nasdaq 100 Index is not confirming the bullish message of the NDX’s higher price highs.

Nasdaq 100 stocks average drawdown amount

Now, we’ve learned not to place too much weight on these sorts of divergences given that the market has generally powered higher despite them in recent years.  However, we did find it interesting given the extremely low level of implied volatility in the Nasdaq indices.  30 day implied volatility in QQQ reached a 10 year low recently:

QQQ 30 day implied volatility, Courtesy of Bloomberg
QQQ 30 day implied volatility, Courtesy of Bloomberg

These extremely low levels of volatility are taking place against a market backdrop that is getting very overbought.

The longer-term perspective suggests two possible paths given the extreme overbought nature of the major indices.  For example, the Nasdaq 100 index has only been this overbought on 2 other instances over the past 10 years, as shown by the daily RSI over 80 in the chart below:

Nasdaq 100 index upper panel, daily RSI (14) lower panel, Courtesy of Bloomberg
Nasdaq 100 index upper panel, daily RSI (14) lower panel, Courtesy of Bloomberg

In the spring of 2010 (first red circle), the overbought reading came just a few weeks before the flash crash, so the extreme overbought reading was a sign of buying capitulation and a market top that lasted 6 months.  In the February 2012 instance, the Nasdaq had just broken out to a new 10 year high, and that breakout has held ever since.

The market is likely in the midst of either a buying capitulation or a continued breakout that could have legs for some time to come.  Either way, we don’t think the market just sits around here given the extreme nature of the recent price action.  However, the options market is implying very little movement over the next few months.  The Sept 20th $95.63 straddle is priced around $4.25, which would mean a 4.5% move in either direction over the next 2.5 months.  Over the last 2.5 months, QQQ has moved around 10 dollars, from around $85 to around $95.  So what’s the best way to play?

A cheaper way to play for volatility over the next 2.5 months would be buying the Sept 92.63/98.63 strangle, which would cost around $1.90 at current prices.  That implies a break-even of about $90.73 on the downside or $100.53 on the upside for QQQ in September.  The strangle plays for a breakout above $100 or a breakdown below the March highs around $91.

There’s also the option of just buying cheap puts that are near the money. The August 95 puts are 1.26 (stock ref $95.38) and it wouldn’t take much of a pullback in the index over the next month and a half for those to have been a nice buy and offering the potential to spread by selling a lower strike put when implied vol ticks up a bit.