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Score Gains with Condors while this Nasdaq ETF Wobbles

The sickness that initially seized tech stocks, as seen in the Invesco QQQ Trust (NASDAQ:QQQ), is infecting other areas of the market. Small-caps are down 10%, emerging markets have tumbled 11%, and the underbelly that includes SPACs and other momentum degenerates is getting torched. The widespread weakness makes directional trades in the QQQ stock ETF ill-advised. I suggest a more sophisticated cash flow trade if you’re inclined to bet here.

stock market screen (food etfs)
Source: Shutterstock

Specifically, I’m eyeing iron condors as the way to play. We’ll dive into the details below, but here’s a high-level overview.

The QQQ stock ETF finds itself stuck in a choppy range. With the upside momentum that carried it higher for months now lost, bullish trades no longer have the odds in their favor. At the same time, bearish bets have been notoriously difficult to make money with, given how rapidly prices rebound when buyers return.

The iron condor presents an elegant solution by allowing you to profit as long as the Nasdaq remains somewhat rangebound, which seems to be the higher probability outcome over the coming weeks.

QQQ Stock Chart

Invesco QQQ Trust (QQQ) weekly stock chart with long-term uptrend
Source: The thinkorswim® platform from TD Ameritrade

To put the past month’s correction in context, let’s start with the weekly chart. The ascent off the pandemic lows last March carried QQQ higher by more than 100%. The index more than doubled in a single year. That would be an incredible feat for an individual stock, let alone for a widely diversified basket that includes the largest companies on the planet.

As bad as the recent tech wreck may feel, it’s perfectly normal (indeed, healthy) for an asset that just doubled to pullback as traders finally pause to digest the gains.

All we’ve done is return to the rising 20-week moving average. While the decline could worsen, for now, it looks like nothing more than a garden-variety correction on the larger time frame.

Turning to the daily chart is where things become interesting. What appeared as a normal correction on the weekly appears slightly more ominous on the smaller time frame.

We first breached the 50-day moving average on Feb. 23 and have remained below it ever since. This is the longest we’ve remained submerged beneath this critical threshold since the bull market began last April. The past four rally attempts have failed to break above resistance. In other words, sellers’ dominance has been established, and they now hold the upper hand.

Invesco QQQ Trust (QQQ) daily chart with break of 50-day moving average
Source: The thinkorswim® platform from TD Ameritrade

In summary, the signals are mixed. The larger time frame fuels hope that this is a pause and nothing more. The daily view confirms sellers have turned the short-term trend lower and are staunchly defending their foothold.

The colliding of these two trends likely results in a stalemate of sorts where prices chop around until a victor is finally declared. Iron condors profit during such times.

Iron Condors

The iron condor is a multi-legged options strategy consisting of a bull put and bear call spread. The idea is to sell both vertical spreads for a net credit that represents the maximum possible gain. If the underlying stock price (QQQ stock in this case) sits between the strike prices of both spreads at expiration, then they will expire worthless, allowing you to pocket the initial premium received.

The Trade: Sell the May $338/$343 bear call and the $275/$270 bull put for a net credit of $1.40.

Consider this a bet that QQQ remains between $338 and $275 for the next six weeks. The max gain is $1.40, and the max loss is $3.60. To minimize the damage if prices fall/rise too far, you could exit on a push below $275 or above $338.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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