Invesco QQQ Trust represents the Nasdaq 100, and it closed near the low of the day yesterday. Meanwhile, the broader Nasdaq composite sliced through its 50-day moving average for the first time since the Nov. 1 follow-through day. With the market uptrend under pressure, today we'll look at a trade that will do well if QQQ drops to around 410.
Taking A Bearish Position On Nasdaq 100
This is a bearish calendar trade, where we sell a short-term put and buy a longer-term put. Placing the calendar below the current price of QQQ gives the trade it's bearish outlook.
Here's the trade:
- Sell the April 26, 410 strike put for around 97 cents.
- Buy the May 10, 410 strike put for around $2.60.
That results in a net cost for the trade of $1.63 per spread. That is also the most the trade can lose.
It's a big benefit that many of the spread trades can get set up where you know your worst-case scenario from the start.
Winning On The Trade
The estimated maximum profit is around $570, but that could vary depending on changes in implied volatility.
The idea with the trade is that if the Nasdaq 100 drops, this trade gets more profitable. To a point.
As QQQ approaches 410 by April 26, the calendar spread will increase in value. At 410 the short put expires worthless and the long put still has a couple weeks of time value. That allows the trade to be closed for a profit.
But if the Nasdaq 100 keeps going lower, the profit will wane and eventually turn to a loss again.
The profit window for QQQ is roughly between 395 and 428 at the April 26 expiration.
The position starts with a delta of -7, meaning the exposure is roughly equivalent to being short 7 shares of QQQ stock, although this will change as the trade progresses.
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 X/Twitter at @OptiontradinIQ
