Considering Our Options – QQQ The Curtains

by CC March 25, 2015 3:22 pm • Commentary

In late Feb we took a bearish stance on the Nasdaq with a put spread in the QQQ when it was $109. Here’s the original trade and rationale:

TRADE: QQQ ($109) Buy to Open May 108 / 98 Put Spread for 2.00

-Buy to open 1 May 108 put for 2.70

-Sell to open 1 May 98 put at .70

Break-Even on May Expiration:

Profits: gains of up to 8 between 106 and 98, max gain of 8 at 98 or below

Losses: up to 2 between 106 and 108, max loss of 2 above 108

Rationale:  I have about two and half months for this trade to break-even down 3% at the very least. I like those odds.  I would also add that the choice of strikes as the break-even level of 106 is at the prior breakout level on the chart, and then the short strike representing a level that should serve as decent support in and around the 200 day moving average.

Since then the QQQ has been all over the place and possibly just double topped in the past month or so if today’s decline is confirmed and the QQQ slips through its 50day moving average (red):

Screen Shot 2015-03-25 at 1.16.11 PM
3 month QQQ from LiveVol Pro

This trade expires in May so we have plenty of time but I wanted to check in on it with this nearly 2% decline today. Right now with the QQQ at 105.90 this spread is worth about 2.90. It’s close to 50 deltas here and decay isn;t too big of an issue yet with several months until expiration.

So it won’t take much of a follow through before it’s a double and at that point we’d have a choice to make. The 50 day moving average is just below and there’s a decent air pocket below that with the next obvious level of support at $100. If we do in fact see a decline below the 50 day we’ll keep a tight leash on the trade as and sign of a bounce would mean it could make sense to sell at least half. If we do air pocket there and 100 looks like a possibility, then we let it ride and maybe just keep a trailing stop above.