The technical picture on the PowerShares QQQ Trust ETF (QQQ) is showing that a “death cross” is in the process of forming, with the 50-day moving average less than $1 away from falling below the 200-day moving average.
The chart below shows that the 100- and 200-day moving averages have been flat and above $107.50 since mid-November. This is somewhat surprising, as the major indices formed death crosses in January, with the small-cap index confirming its own last September.
I told my Momentum Options subscribers as we entered February that a lower trading range might be coming into play, including the possibility of lower lows. Although premiums are slightly juiced on QQQ put options, there are ways to capitalize on continued weakness with the chance of making a double- or triple-digit profit. Here’s my recommendation:
Buy to open the QQQ March 93 puts (QQQ160318P00093000) at current levels. These puts are trading at around $1.00 as I write, and entries up to $1.10 are fine.
My Exit Target is $2.00, where I suggest taking half of your profits off the table.
I also have a Stop Target at $0.50 to minimize losses if the trade moves against us. I will, of course, be watching the underlying QQQ shares for signals, as well.
These put options are “out of the money” but have more than five weeks of time premium remaining. If QQQ shares fall to $91 by mid-March, these options will easily double from current levels. This would require about a 10% drop in the QQQs from current levels.
Short-term support levels are at $102.50, followed by $100. A close below the $100 level could lead to a test to $97.50-$95. Given the risk/reward, these options offer great downside “protection,” with the possibility of a fabulous return if QQQ makes a trip back to the Aug. 24 low of $84.74. Those levels could come into play, depending on the severity of a continued pullback.
Short-term resistance for QQQ is at $105, and I like this trade as long as $106 holds. A move above this level could force me to make an early exit.
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