All eyes are on the technology sector today. The questioning class wants to know if Friday was a one-off or the start of something more ominous. As usual, time will tell, but if you’re itching to get in on the action, the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is offering an attractive trade setup. Indeed, QQQ volatility is through the roof and ready to be sold.
The beauty of using an ETF like QQQ to place your tech bets is it allows you to sidestep stock-picking altogether. Rather than guessing which stock in the Nasdaq-100 ETF will bounce back best, we can simply buy the entire cohort.
At this morning’s lows, the Nasdaq-100 fund came close to testing its rising 50-day moving average. With its weekly trend still firmly pointing higher, you would think buyers would come out of the woodwork on the first test of this potential support level.
In fact, we are seeing an intraday bounce as I type.
QQQ Volatility Trade
What’s particularly interesting is the way in which fear rushed into the market over the past two trading sessions. The dash for protection has driven the QQQ’s implied volatility rank to 75%. Meanwhile, the broader market is yawning. The S&P 500’s implied volatility rank still languishes at a lowly 12%.
There’s no doubt the fear rampage has been isolated to tech stocks so far.
One benefit to the volatility ramp is that traders can now sell QQQ options for respectable premiums. If you think the tech wreck remains contained, selling July bull put spreads offers a high probability of success.
Sell the Jul $131/$127 bull put spread for 42 cents credit. Consider it a bet that the ETF will sit above $131 at expiration. If it does, you will capture the max reward of 42 cents.
The risk is limited to the spread width minus the net credit, or $3.58, and will be forfeited if QQQ slips below $127.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.