The hotly anticipated Federal Reserve meeting arrived this week, and the usual bout of volatility is seizing financial markets. As I survey the aftermath, two major themes become clear. First, high-multiple, high-growth stocks do not like the faster pace of tapering. Nor is the specter of three rate hikes next year helping their cause. Second, there’s a massive amount of rotation into defensive areas.
Consumer staples, utilities, healthcare, and telecom took flight Thursday, even as the broad market indexes melted. Whether this is the beginning of a more prolonged capital shift or simply a short-term shuffling of the deck remains to be seen. But one thing is for sure. Growth stocks’ price charts are battered and bruised.
If you think the pain continues, there are myriad ways to profit using options. I scanned my watchlist and discovered the following three candidates:
This week, they all struggled and saw heavy selling pressure following the Fed. So let’s take a closer look at each chart and build a trade to profit.
Growth Stocks: Invesco QQQ Trust Series 1 (QQQ)
If you want a diversified route to play the deterioration, consider the Nasdaq. The tech sector hosts the who’s who of growth stocks, making it a good proxy for betting against the theme. This week’s volatility has been vicious, and prices are cracking below the 50-day moving average. At the same time, the 20-day moving average is rolling over and confirms the short-term trend is now down.
Rather than an aggressive directional trade, I suggest taking the higher probability route. The mega-caps that dominate the index may keep it aloft, even as smaller growth stocks crumble. I like selling out-of-the-money bear call spreads. Consider it a wager that QQQ won’t make a new high over the next month.
The Trade: Sell the January $408/$412 call vertical for 50 cents.
If prices are below $408 at expiration, you’ll capture a 50 cent gain. The initial cost, and max risk, is $3.50. You can minimize the loss by exiting on a break above $408.
Adobe is a mainstay among growth stocks. Its long-term chart is legendary, and shareholders have been handsomely rewarded. But they’re giving back some of their mountainous gains this week after the company reported disappointing earnings guidance.
If the past is prologue, this dip will eventually be a buying opportunity, but don’t be too hasty. The chart is broken, and we’ve entered a tricky environment for this area of the market. Last quarter’s earnings gap saw downside follow-through, and I think this one will be similar.
To combat Adobe’s lofty price tag, we’re going with a put spread versus buying puts outright.
The Trade: Buy the January $550/$530 put spread for $8.20.
The max loss is $8.20, and the max gain is $11.80.
Growth Stocks: Salesforce.com (CRM)
Adobe wasn’t the only stock whiffing on earnings this quarter. Salesforce.com shares plunged last month after releasing underwhelming numbers of its own. The oversold bounce resulted in a lower pivot high, and just this morning, prices are breaching support and the 200-day moving average. That places it on the underside of every moving average, which is about as bearish a place as you can be.
While it may not be a straight shot lower, rallies are suspect, and gravity is in control here. Like Adobe, I prefer put spreads.
The Trade: Buy the January $250/$240 put spread for $4.20.
The max loss is $4.20, and the max gain is $5.80.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. . The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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