QQQ-Tip?

by Dan March 3, 2020 11:46 am • Trade Ideas

ICYMI, the U.S. Federal Reserve enacted a “surprise… emergency” rate cut of 50 basis points this morning to combat the growing negative economic impact of the coronavirus. Over the last twenty years the “surprise… emergency” rate cuts have done little other than squeeze shorts in the near term, and a look back to early 2001 (here) and 2008 (here) “emergency” cuts, it took markets months to bottom after quickly making new lows.

On Feb 19th (Pride Goeth Before the Fall) I detailed my near-term bearish view on U.S. stocks despite gleeful boasts from the White House about our white-hot stock market and a near disregard for the fear that was spreading around much of the globe about coronavirus spreading outside of China.

The ~10% bounce off of Friday’s lows, after the historical ~15% decline from the Feb 19th highs has gotten a lot of traders turned around. But with the Fed’s (initial) Action out of the way, and two week’s to their next meeting I suspect U.S. stocks break Friday’s lows in the interim as there is little by way of fiscal stimulus that is likely to be enacted and the worst of the headlines for the U.S. as it relates to the spread of corona are likely to come in the next week or two very unscientific opinion.

Rather than focus on the S&P 500 this time, I want to look at the QQQ, the Nasdaq 100 ETF where MAGA (MSFT, AAPL, GOOGL & AMZN) still make up 40% of the weight rule the market. It is my sense that these stocks, despite the company’s fortress balance sheets and near-monopoly status could be used as a source of funds because they are so widely held and their outsized performance over the last year.

On Friday the QQQ bounced at its 200-day moving average, which is also the 1-year uptrend, this would be my near-term target at the very least for a defined risk short trade but likely it would overshoot possibly below $190 near the Oct low:

 

So what’s the trade?

Bearish Trade Idea: QQQ ($214.50) Buy April 210 – 185 put spread for $5

-Buy to open 1 April 210 put for $7.50

-Sell to open 1 April 185 put at $2.50

Break-even on April expiration:

Profits of up to 20 between 205 and 185 with max gain of 20 below 185

Losses of up to 5 between 205 and 210 with max loss of 5 at 210 or higher.

Rationale: this trade idea breaks even down 4.5%, risks 2.3% of the etf price and offers 8% max profit if the etf is down 12% in 45 days.