With a confirmed death cross on the S&P 500 last week following the Dow’s death cross earlier in August, questions are surrounding the Nasdaq, which seems to be following suit.
The Nasdaq’s 50-day moving average is now below the 100-day moving average, which formed a mini death cross, and it is also spiraling lower. The October 2014 low on the Nasdaq reached 4,116, and any retest and close below 4,500 should be the clue to go short.
For a potential trade, there are several put options to look at, if and when the 4,500 level cracks on the Nasdaq, to play a possible 400-500 point shellacking using the PowerShares QQQ Trust (QQQ), or simply the Nasdaq ETF.
The QQQ Sept. 18th $94 puts (QQQ150918P00094000) are super cheap and can be used to play a breakdown to Chinatown. These options would be worth $10 if the QQQs test $84 by mid-September. The one caution I have with these options is that they expire in three weeks, and I often call this period of time the “danger zone” for options. If the QQQs stay above $94 by mid-September, these options will expire worthless.
The QQQ Oct. 16th 90 puts (QQQ151016P00090000) offer another month of time premium and might be the “safer” trade. These options would be $6 “in the money” if the QQQs test $84 by mid-October, which would be, as Peter Lynch would say, a “7-bagger” from current levels. These options traded nearly 17,500 contracts on Friday, while the QQQ Separate. 18th $94 puts traded nearly 5,000 contracts.
On the flip side, if the Nasdaq clears 4,900-4,925 and the 200-day moving average, bullish traders could target QQQ call options.
If the QQQs can get past $107, the QQQ Sept. 18th $110 calls (QQQ150918C00110000) could be used to play a possible run to $110 or higher and a move past the 50-day moving average.
The QQQ Oct. 16th $112 calls (QQQ151016C00112000) are a little more expensive and represent a higher strike price than the QQQ Sept. 18th $110 calls. To break even on the trade, the QQQs would need to trade up to $113. The 52-week and July high for the QQQs reached $114.39. If $114 triggers by mid-October, the QQQ Oct. 16th $112 calls would be $2 “in the money,” which would mean a double from current levels.
As a potential strangle option trade on the Nasdaq, the QQQ Oct. 16 $112 calls and the QQQ Oct. 16th $90 puts would cost roughly $1.75 if purchased together. If the QQQs test $114 by mid-October, the trade would net a small gain and would double if $117.50 is reached.
If the QQQs trade down to $88, the aforementioned trade would make a decent gain, and it would double if the QQQs kiss $86.50 by mid-October.
A note regarding the Bank of American (BAC) calls we’re holding: BAC shares need to recover $16.75 and the 200-day moving average before I will feel confident about a recovery. I still want to hold this trade open for another week or so, possibly longer, in case September turns out to be a bullish month.
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