On March 1st, after the QQQ seemed to fail at a double top trading just below $167, we detailed a defined risk way to play for a retracement back towards the February lows:
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
With the bloodbath, we’re seeing in some of the FAANG stocks, and now Washington Post owner Jeff Bezos on the receiving end of Twitter threats from you know who about Amazon, the QQQ is getting killed and we’re now below the short strike on this trade.
Currently, with QQQ 154.50, the put spread is worth about $8 vs the $3 initially risked. It maxes out here or lower at $11 so it probably makes sense to look to take profits soon on this trade if it was an outright bearish bet, and look for a bounce to re-enter with something much cheaper.
If it was for a portfolio hedge it now makes sense to look out and down for a potential roll to book some of this initial hedge and to gain continued protection if this turns into a crash. The issue with any roll right now is the current spike in volatility, so I think it makes sense to try to finance any downside protection from here with a call sale back at levels where this trade was initiated.
Right now the June 150/140 put spread is about 2.40. The June 166 calls are also 2.40. So the roll would be to sell the April 167/156 put spread for a $5 gain and buy that put spread collar for even money.
Selling those 166 calls runs the risk of being called away in QQQ on a massive spike higher in the next few months that wipes out this selloff, so this isn’t a trade I would put on now out of the blue. But for those that had the initial portfolio hedge, can book $5 in gains from that hedge here, and then buy further protection in case the selling gets even uglier, it makes a ton of sense.
If the market were to find its footing and bounce from here this hedge would have mark to market losses, but there’s no need to panic unless QQQ got near 166 on a bounce, and even then the losses would be small compared to the combination of portfolio gains from here supercharged by the $5 saved on this selloff by the QQQ hedge.
If the market continues lower its free protection between 150 and 140 in the QQQ.