On January 24th we looked at the upcoming earnings from some of the tech giants that had powered much of the slow and steady returns we’ve seen over the past year in the QQQ. We detailed a portfolio hedge (or outright bearish) and now a bunch of the big names having reported, and with a sudden bout of volatility in the overall market let’s check back in on the trade idea:
Buy the QQQ (168.70) Feb16th 167/157 put spread for 1.90
- Buy 1 Feb 167 put for 2.30
- Sell 1 Feb 157 put at .40
With the QQQ now 163.20 this put spread is worth about 3.25. So a decent gain as an outright, and if done as a hedge the protection is starting to kick in. In either case, the stock is now below the breakeven on the trade and intrinsically is worth about 3.80, so decay isn’t a worry (in fact it benefits slightly). So the more important analysis on this is direction and how moves from here affect the trade.
The breakeven on the trade is 165.10, and close below that and it will make money. It can still be worth up to $10 if the QQQ is at or below 157 next Friday. Therefore, for trade management purposes it probably makes sense to be patient on any rolls if it’s a hedge, or any profit taking if it is outright. Keeping a stop above should the market bounce makes sense, certainly the breakeven on the trade (165.10) is a spot to keep in mind, as well as the upper strike level of 167. But should the market continue lower this week, this put spread as is will give you the most bang for your buck as a hedge or outright bearish position. The put spread is short more than 50 deltas here and that will continue to pick up (become even more bearish) as long as the QQQ is around this level or lower.
We’re seeing the potential volatility that this trade idea was looking for right now. Therefore it has an ideal expiration (next Friday) to take advantage of that. If the market finds some footing in the next few days that can be re-assessed and this trade could be rolled. We’ll update again in the next week.