Volatility continues to be the market’s watchword. The popular CBOE Volatility Index (VIX) tagged a new five-month high amid a roller coaster session Wednesday. With signs of capitulation finally coming to the fore, some may be looking to satisfy their bottom-fishing itch with a contrarian play or two.
The Nasdaq-100 in particular is looking tempting for a bullish trade here.
The PowerShares QQQ Trust, Series 1 (ETF) (QQQ) has fared much better than most indices during the ongoing crash, and that’s usually a good omen for future performance. Stocks exhibiting relative strength during a downturn are often the first to spring higher once the selling pressure finally abates.
But that’s not all.
The risk-reward is becoming so skewed in favor of a snap-back, it almost demands some type of bullish trade. And QQQ has descended to quite the logical spot for just such an attempt. It’s resting near a major support zone at $98, which halted the previous two declines in late 2015.
Wednesday’s snap-back showed an impressive willingness by the bulls to vigorously defend this level.
QQQ Stock Chart
While I don’t doubt that more downside looms for QQQ in the intermediate-term, in the short-run it seems worthy of a rebound.
The QQQ Trade
Those wishing to try their hand at the old knife cattch should tread lightly. While we could swing for the fence and load up on calls, I prefer traveling the higher odds route by selling bull put spreads. Not to mention the fact that puts are extremely pricey here, allowing us to capture more credit than usual.
Sell the QQQ Feb 92/87 put spread for 56 cents. Consider it a wager that QQQ stock can remain above $92 for the next month. The max reward is limited to the initial 56 cents. The max risk is limited to the distance between strikes minus the net credit, or $4.44, and will be lost if QQQ falls below $87 by expiration.
To limit the risk, consider exiting if QQQ falls below $95 or so. Such a drop would invalidate the recent bottoming attempt, break support, and merit a swift exit for those looking to bail at the first signs of failure.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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