It’s been a while since we’ve had some bearish setups to tackle. My bearish muscles are out of practice!
But the ASC team during the most recent Monthly Charts Session pointed out some bearish developments in the Nasdaq 100.
Here’s the chart they shared:
That overhead resistance coupled with a declining RSI has the guys thinking we might be in for a little downside action. They certainly aren’t calling for a crash, but a nice pullback wouldn’t be surprising here and could ultimately be healthy for the markets going forward.
But since this isn’t a bearish setup that gets me wanting to be overly aggressive here, I’m going to attack this thesis with a ratio spread that will pay us a little for our efforts if we’re dead wrong, and could potentially pay us BIG if a sudden downdraft materializes.
Here’s the Play:
I’m entering in to a $QQQ July 330/300 Bearish Put Ratio Spread. For every contract I enter short at the 330 put strike, I’ll purchase two contracts at the 300 put strike (1×2). The result of this transaction should be a credit of around $2.75, give or take a few nickels. I’m not so concerned about getting a precise entry price, but I do want to make sure to earn an overall credit on the transaction.
This credit is important. If we’re wrong and Nasdaq regains it’s footing and either consolidates here or screams higher, then “worst case” scenario is we keep the credit we collected for the entire spread.
If the market does indeed begin to crack, then this position will benefit in two ways: from the directional bet, AND from a highly likely rise in volatility.
The ASC team has a downside price target for $QQQ of $275. If/when we get to that level, I’ll look to close the spread and book the profit then. The timing of when that happens will determine the overall profitability of the trade.
As far as positional risk management goes, I’m going to close the trade down if the cost to close the spread exceeds $10.00. That’s my uncle point. If we’re still in this trade when we get into the month of July, I’ll look to close the entire thing down (win or lose) if $QQQ is below $330. In this case, theta will be our enemy and we’ll start losing money at an increasing daily rate. If we’re above $330, I’ll look to close the entire spread down for $1.00 or less and book a small profit.
If you have any questions on this trade, please send them here.
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