Updates… Risk Reversal… SPY, QQQ

by Dan March 9, 2020 12:03 pm • Trade Updates

Regular readers know that I am not perma-anything, I like to think of my market punditry and analysis as a bit contrarian to what tends to be the norm in the financial media. I’m not sure what my value add would be to just join the chorus of financial pundits that suggest to buy ’em the whole way up and buy ’em the whole way down. I like to think a bit tactically and use my expertise using equity options to help investors protect individual positions and portfolios, but also use options to add yield or leg into contrarian longs in periods like these.

Most importantly, I am not your stockbroker, financial advisor or hedge fund manager, just a guy who tries to offer unfiltered and transparent thoughts on markets and stocks, and offer readers/viewers who are willing to do their own work and analysis with an interest in an alternative financial product, options, That has always been our value proposition, we are not a trading service, I can’t make you money, only you can do that for yourself. But I can tell it to you straight, and I can try to help on the education front.

Over the last couple of months since the start of the year, I have detailed many bullish and bearish trade ideas (read here) but have been particularly bearish over the last few weeks.

On Feb 19th when the S&P 500 (SPX) made a new all-time high I discussed just how cheap SPY options appeared to be:

Pride Goeth Before the Fall – SPY

If you look at the Twitter feed of the POTUS he appears to display a great deal of pride about many bad things… It reminds me a bit of what I deem to be some downright nasty things going on in risk assets and the pride that our politicians, central bankers, and market cheerleaders revel in as a result. If you subscribe to the really old saying Pride Goeth Before the Fall, then you might want to consider portfolio protection in the SPY.

Break-even on March 31st:

Profits below 328.50

This morning the SPY traded $273.50, down 19% from the Feb 19th levels.


On March 3rd, after a fairly sharp rally off of the low just a few days earlier I made the case why mega-cap tech would likely retest the low from Feb 28th:


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:


This morning the QQQ made a low near 192, now with the etf at 200 this put spread is worth $10


These are certainly fast markets, and the advice I would offer on how to trade positions like this on extreme moves is to consider closing vertical spreads as the underlying gets close to your short strike or look to spread out right puts by selling a lower strike put creating a put spread or roll down and out,

Also keep an eye out for my Fidelity In The Money series where I offer similar strategies on sector & index etfs also bearish strategies of late on single stock names like CSCO, FDX and BIDU and bullish strategies on EBAY, JBLU and DE.