QQQ have outperfomed SPY and with an IVR of 42 we are getting at least something for taking the risk against this Raging Bull Market.
Also we have divergence and already over 2 standard deviation move in the last 20 days to help us make the case to go short.
The Trade 42 days to Expiration Short the 165 Calls For $1.22 Credit Probability of profit 72%
PS: I treat this trade as a combination from the SPY ratio, since they are very highly correlated.
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Price have continued to move up, and against this trade.
I will start defending this trade by selling the 160 Puts for an additional $0.95 ea making a Strangle. This will improve our break even to the upside and our max profit, but now we are adding risk to the downside if it moves more than the expected move (denoted in the Gold Cone). However since is a hedge we are not using additional capital to do this.
Here is how the trade looks like now:
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Another strong day on QQQ and now it is above our break even. I can Roll the put up, but I don't want to make my profit zone too small and risk getting whipsaw, I will give it a little more time just in case.
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With the increase in volatilty I decided to roll and extend time to be right. I rolled the Feb 165 Call to March (Same strike) and the Feb 160 Put to the 165 March Put, making a Straddle at the 165 price (That's where we need the price to move). I got $3.25 for it, so now I would have to added to the previous credit received = $5.40 credit. Our max profit is $540 per contract at the 165 price.
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With the increase in volatility, I am drawing the new expected move after my last adjustment. The riskiest side is of course to the upside where I have now a 54% chance of winning. To the downside, I have over 80%.
ok so the straddle expects this thing to go no where. yeah that makes sense, bulls and bears lose.
AlexanderGotay
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@TomPower, Hey Tom. Actually, the straddle is at the 165 price, so I need it to move down a little (At this point I am just defending and moving my profit zone upward). Clearly, the bulls are winning, but if we get some profit taking then we will get that need it pull back.
brewster744
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Hi ALex ...can i just ask you where you got that Expected move indicator ... the gold cone. Been looking for something like this for a while.
Keep up the good work!
TIA
Bruce L
AlexanderGotay
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@brewster744, Hey Bruce. Is not really an indicator. I just get the expected move from the option prices on my broker's software. I just draw it on the chart so that is visually easier to follow during the trade.
TomPower
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Alex, thinking there will be a catalyst in early February when earnings start hitting the tech sector. But you tell me what in the world is driving this thing up.
AlexanderGotay
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@TomPower, Thanks for the comment. I agree that this thing has to correct or take a dive soon, this looks parabolic and in my opinion, it is driven mainly by emotions.
Specially Greed and Overconfidence. At the beginning of the year, the difference between Put and Calls (Put/Call Ratio) was very low, suggesting a bullish market sentiment.
Now, however, it started to climb, so investors are starting to show some concern and want some protection just in case.
This can also be seen in the rise of the VIX at the same time as the Market. If we continue to see this behavior I would try to stay with a Big % of the portfolio in cash.