In early November we looked at the concentration of tech behemoths in the Nasdaq 100 (QQQ) as some of the largest components started showing signs of exhaustion:
Since reporting calendar Q3 results in the last week or so, Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN) and Facebook (FB), have lost between 5 and 10%. That is equal to nearly $200 billion in combined market capitalization.
At the time, and based on those warning signs, we looked to finance out of the money puts in the QQQ, while not looking for an immediate sharp drop, but setting up for one early in the new year. Here was that trade idea from Nov 3rd:
*QQQ ($115) Buy the Nov/Feb 110 put calendar for 2.10
- Sell 1 Nov 110 put at .65
- Buy 1 Feb 110 put for 2.75
The recent rally in the broader market has the QQQ higher than our entry, but the sale of the Nov puts which will expire worthless today has softened the blow. With the QQQ at 117.40 today this trade, which as of Monday will simply be a Feb put is worth about 1.65, or a .45 loss mark to market.
As far as rolling the short put out, December 110’s make sense, but right now they are just under .40. So we’ll wait for a down day to do that roll and simply let the Nov puts expire worthless for now. As far as when to pull the trigger on the Dec 110 puts, the best timing would be when/if the Jan puts go 2.10 bid (our original risk).
Right now the Jan 100 puts are about 25 deltas. So about 2 dollars lower, near our original entry should do. That would mean the QQQ needs to fail to hold the 50 day moving average (117.25) just below where it is currently trading:[caption id="attachment_68316" align="aligncenter" width="600"] QQQ 1yr chart from Bloomberg[/caption]
If the QQQ does hold here and go higher we’ll keep a 50% stop loss on the 2.10 at risk.