As rates rise, growth stocks find themselves struggling to make gains. The Invesco QQQ Trust, which tracks the tech-heavy Nasdaq 100, closed near lows of the day yesterday and is also back below the 50-day moving average. If you plan to hold some tech stocks even with the market officially in correction, you could consider using options on QQQ stock for some protection against a downside move.
Bearish Calendar Spread Looks For QQQ Stock Drop
For this calendar spread, we'll sell a short-term put on QQQ stock and buy a put with an expiration further out. This particular trade will do well if QQQ stock drops to around 330.
Placing the calendar below the current price of QQQ stock gives the trade it's bearish outlook.
Here's the setup:
Sell the Oct. 20, 330 strike put for around 1.25, then buy the Nov. 17, 330 strike put for around 2.85.
That results in a net cost for the trade of 1.60 per spread, and that is the most the trade can lose.
The estimated maximum profit is around $700, but that could vary depending on changes in implied volatility.
How The Trade Profits
The idea with the trade is that if QQQ stock trades down to 330 by Oct. 20, the calendar spread increases in value. That allows the trade to be closed for a profit. If you're holding onto some tech stocks, that can help counteract some losses that may be incurred, offering some protection. There's a lot of volume in the options here so it's very liquid for larger positions.
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The position starts with a delta of -6. That means the exposure is roughly equivalent to being short 6 shares of QQQ stock. Keep in mind, this will change as the trade progresses.
The break-even prices are estimated at around 310 and 355.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
