Markets have continued their impressive move higher so far this summer. During that move higher, the Nasdaq has been the leader with names like AAPL, FB, AMZN, and GOOGL leading the charge. As we head into the end of summer, we are expecting the market to slow down and potentially reverse to the downside.
With this week’s Options Trade Of The Week we will be looking to benefit from a market pullback. We will use QQQ which is the Nasdaq ETF for this trade. Since we want to lean bearish on this trade, we will be selling a call spread.
Why wouldn’t we just buy a long put option?
The problem with buying a long put is it would only give us 1 way of making money on the trade. QQQ would need to move lower quickly otherwise the time decay would hurt us. While it would give us more profit potential, it also comes with the lowest probability of success.
Instead, by selling a call spread we will give ourselves 5 ways of making money on QQQ. We can make money if the stock moves up, down, or sideways as long as price stays below our breakeven point. We also make money from time decay adding up and from volatility decreasing. While it gives us a lower profit potential when compared to the long put, it provides a higher probability of success.
We will be selling the QQQ 21Sep18 185/186 call spread for $.37. These are the September monthly options with 42 days left. We are selling the 185 call and at the same time buying the 186 call to make it a risk defined trade.
For a complete break down of our Trade Of The Week make sure you review the video below. We will cover the details of how we are placing trade trade including how we plan on managing it from start to finish. Feel free to contact me directly with any questions you might have. Mike@netpicks.com.