Considering Our Options – $QQQ and $IWM May Put Spreads

by CC May 5, 2015 3:19 pm • Commentary

We have several defined risk short positions in ETFs, including the QQQ and IWM. With the market down today it’s a good opportunity to start thinking about trade management. First, let’s recap the positions. First, in QQQ:

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

We put this trade on back in late February and it’s been profitable from time to time on mini pullbacks in the QQQs. But we’ve been reluctant to take profits as the risk reward is so good if it did in fact violate its 50 day moving average in any meaningful way. So far though, it hasn’t:

Screen Shot 2015-05-05 at 12.59.38 PM
3 month QQQ from LiveVol Pro

It’s testing that moving average once again today. If it does hold again we’ll have no choice but to close the position. But a further breakdown here means a lot of room to the downside with just the recent selloff levels at 106 and 104 and then the 200 day moving average at 102 below as support.

Right now with the QQQ at 107.60 this spread is worth about 1.30 and is about 50 deltas. So at 106 we’re up a little money and that will be a decision point. Breakeven on a selloff in the next few days probably gets us to even around a dollar lower than here. We’ll keep an eye on it as it’s barely in the money and therefore at risk of quick decay if the market holds here.

On to IWM. Here’s the original trade: 

Trade: IWM ($122.85) Buy to open May 120/115/110 Put Butterfly for .55

-Buy to open 1 May 120 put for 2.05

-Sell to open 2 May 115 puts at 1.00 each or 2.00 total

-Buy to open 1 May 110 put for .50

With IWM 120.40 this trade is still barely out of the money on the 120 strike, and it’s only a slight winner, currently worth about 90c. This has big potential because we risked so little of the maximum possible gain intially, and any breakdown from here means rapids gains with 115 being the sweet spot for the trade. It’s about -28 deltas at the moment and those will pick up if the stock drops below 120. But this is still out of the money, so a bounce in the market here puts the entire premium at risk with expiration less than two weeks away. IWM is below its 50 day moving average (unlike QQQ, SPY and DJIA which are all testing theirs today), but it is at (weak) technical support in the form of the March lows around 120.

[caption id="attachment_53378" align="aligncenter" width="630"]Screen Shot 2015-05-05 at 1.14.41 PM IWM 6 month from LiveVol Pro[/caption]

Basically all the major indices are at some sort of support on today’s selloff and what happens into the close and tomorrow morning will greatly determine trade management in the above trades.