Update – QQQ Tip

by CC March 28, 2018 11:12 am • Trade Updates

You could be forgiven in late January for thinking that 2018’s stock market would be no different than 2017. But there was something a little scary in how fast stocks ripped higher in the New Year. February confirmed that it was too far too fast as we saw a spike in volatility and a quick move lower unlike we’ve seen in years. What happened afterwards was even dumber, as stocks bounced back sharply and failed once again near ther January highs.

On March 1st, after the QQQ seemed to fail at a double top, we detailed a way to play for a retracement:

So what’s the trade? I think we see $155ish before $175 in the QQQ by the end of Q1, with options prices looking reasonable to movement, and after such a strong bounce, I want to play with defined risk for a move back to $155.

QQQ ($166.70) BUY APRIL 167 / 156 PUT SPREAD FOR $3

-Buy 1 April 167 put for $5

-Sell 1 April 156 put at $2

At the time the QQQ was 166.70, with the bloodbath we’re seeing in some of the FAANG stocks in particular, we’re right back down to the spot this put spread targeted. Currently, with QQQ 157.50, the put spread is worth about $6.50 vs the $3 initially risked. That’s a nice quick profit if outright or a hedge. But it can be worth up to $11 if the stock closes at or below 156 on April expiration.

As far as trade management, if it was outright I’d watch this level for a bounce or a break. If the market breaks here this trade will quickly be worth 11. If it bounces I would keep a stop above and know that you have a little room for a bounce where the trade still gains in time value (right now it is intrinsically worth 9.50 vs the 7.50 it is worth mark to market).

If this was a portfolio hedge I think you remain patient in the case of sideways or higher, but if the market breaks lower here look to roll this down and out a bit, booking some profits on the hedge but gaining protection if the market continues lower. With the lower strike almost in the money now this will only protect for a few more dollars, and if this selloff is the big one you’ll want to keep rolling it lower to take away a good part of the sting of stock losses elsewhere in your portfolio.