The Nasdaq has been in a clear bear trend for the last six months, with Invesco QQQ Trust below declining 50- and 200-day moving averages.
One trade that could take advantage of further weakness in QQQ stock over the next few weeks is a bear put spread.
A bear put spread is a debit spread, meaning that we need to pay the premium in order to open the trade.
If we place the bear put spread out-of-the-money we have a trade with low cost and a high reward potential if the stock drops.
On QQQ stock, a bear put spread could be set up using the 290 strike as the long put and the 285 strike as the short put for June 17 expiration.
This trade would cost around $130 per contract with a maximum potential gain of $370.
To achieve the maximum profit, this trade would need QQQ stock to drop 7.84% between now and expiration on June 17.
The break-even point for the bear put spread is 288.70, which is calculated as 290 less the $1.30 option premium per contract.
A Chance For Profit At Higher Prices
If QQQ stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if QQQ stock is trading above 290, the entire spread would expire worthless and the trade would lose 100%, or $130.
For a trade like this, I probably wouldn't bother with a stop loss. Either the trade works or it doesn't, so I would trade an appropriate position size in case I suffered the full 100% loss.
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
