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Episode 18 Overtime: Revisiting the Long Call Spread for PowerShares QQQ Trust (NASDAQ: QQQ) - YouTube
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- Welcome to the stock play
of the day overtime edition.
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This week on Monday, we talked
about a long call spread
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in the QQQs.
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That is the ETF that tracks the NASDAQ.
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We'll discuss, did we
fumble or did we score?
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(fast paced music)
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(alarm rings)
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Hello, my name is Brian Overby.
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I am the Senior Options
Analyst with Ally Invest.
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All right, on Monday we
looked at a momentum trade.
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It was a speculative trade in that
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we did a short term long
call spread in the QQQs.
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We talked about on the show
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that we had the Qs
running to all time highs
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or the NASDAQ, the NDX, and we were hoping
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that that momentum would continue
for the rest of the week.
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So let's jump in and let's
look at the actual trade
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that we discussed.
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Here we have the Ally
Invest option chains.
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On the left hand side,
we have the call options.
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Today the Qs, the market
has been very finicky today.
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It was down a little bit, now it's up.
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We see that the Qs right now are at 237,
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approximately almost $3 on the day.
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And if I scroll down to
the Ally Invest option
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chain workbench, we see this
was the trend that we had on.
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We looked at buying the June
19th expiration 238 strike call
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and selling the June 19th
expiration 243 strike call.
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So our hope was by the end of the week,
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the stock would be up above 243,
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and we actually went out to the 19th.
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So we gave ourselves
a little bit more time
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than just one week.
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So now let's go and look at the charts
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and talk a little bit about what happened.
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There's a lot to talk about
here on the overtime edition
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of the stock play of the day.
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Mainly because whenever
we do these trades,
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they're not meant to be recommendations,
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we're just trying to learn.
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So a lot of things happen
that we can learn from
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in this trade.
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So the first chart that we
have is the actual stock chart
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of the QQQs, it's a five-day stock chart.
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I drew a segment on here
that goes right across
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the middle of the screen in this instance.
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But basically that
means on Monday at noon,
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this is approximately where
the underlying stock was at.
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So it was right around 239
when we put the trade on,
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we bought a little bit
in the money option.
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Remember we bought the 238
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and we sold an out of
the money option of 243.
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The speculation to
total trade costs $2.50,
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which was your total risk for the trade.
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So now, if we look at this, I
actually was paying attention
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the next day, when we put on this trade,
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we basically, the market
went up from that point on
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and I took a screenshot the next day
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with the market at 243.85.
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Now I just happened to be
by my computer and noticed
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that the stock had went
through our short strike
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to the upside, which is
good on a long call spread.
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So if we look at that one to 243.85,
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that means that the QQQs
at that point in time
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we're up $2.28, it was
just after two o'clock
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on Tuesday, the day after the show.
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And I bring this point up
because I see the midpoint
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was trading for $3.37.
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Now we can talk about trades
all that we would like to,
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but one of the biggest things
is that you have a plan
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and what is your plan?
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And we discussed two different
plans that we could...
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Basically, we set up our risk
where we had a 50, 50 rewards.
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In other words, we paid 250 for it
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and we could make 250 for it.
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It was a five-point wide spread.
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And we said, "Well, you
could just let that run."
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And you say, "Come back
at the expiration date
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"and see where it's at."
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But also you wanna pay
attention to it in that
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if you could get out for
close to the maximum,
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you definitely wanna do that.
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And the maximum that
it can trade for is $5.
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You paid 250 for it.
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You'd be making approximately $2.50.
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So what do you do if
you wake up the next day
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and all of a sudden you see
that position up a dollar.
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What would be your aspect of it?
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Now, do you stick to your plan?
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You still have a long way
to the expiration date.
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And I'd already mentioned
one of the hardest things
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about a long call spread is
that you're selling an option
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that wants the market to go
down and you're buying an option
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that wants the market to go up.
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So on our trade on Monday,
the mid point of the trade
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was around $2.45.
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That meant $245 for each one
by one spread that you did.
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And now we see on Tuesday at two o'clock
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it's trading for $3.35.
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So you're almost up a dollar.
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So my question is, do you sell and get out
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or do you stay the course and
see if the momentum continues?
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One of the biggest things
that happened is that
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we did break through an all time high,
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and basically what we
talked about on the chart,
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which I'm gonna show you here
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in just a little bit happened.
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So, in my opinion, if I was
looking at this straight,
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I probably would have
stayed the course, why?
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Because that was the plan.
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That's what we were looking at.
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Now, how many people can do that
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overall is a bigger question,
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but the plan was that we
were gonna try to get more
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on the upside, and then
maybe if it was reverse
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and the market went down that dollar,
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we would think about
getting out on the downside.
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But you had to determine that
risk and what your plan was.
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And the biggest thing about a plan
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is you have to stick to it
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and you have to be consistent with it
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when you're doing your trading.
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So here's exactly what happened.
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Here's the chart.
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And I find this in that I
did not adjust this chart
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from the Monday show and
that this channel was drawn,
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the support was drawn overall,
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but the chart continues
on until the current days,
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'cause it's a five-day trade.
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So what did we see happen?
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When we talked about breaking
out to the upside here,
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and then that trend
continued until it didn't,
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which was basically yesterday,
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which was Thursday of this
week, the market came down
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and it actually, you see
right when it broke through
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the trend line, it
actually dropped down hard
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to the end of the day.
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Now, today we've got
kind of mixed markets,
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but another thing to point out too is that
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we've talked a lot
about how the technicals
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during this pandemic
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and during this very volatile marketplace
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have played a pretty big role.
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And we see that we came all the way down
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and just touch that 20-day moving average.
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And that seemed to add
a little bit of support
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to the QQQs or you could say
the NASDAQ index overall.
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The NASDAQ looks very
similar chart to the QQQs.
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All right, so now what
happened over that week?
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Well, when the market got
all the way up to 247,
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it should have been fairly
close to your maximum,
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and you should have been thinking
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about getting out of your trade.
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I don't necessarily need
to make the $5 overall
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if I have two weeks
remaining in this trade,
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and I see that it's
trading at $4.50, $4.75,
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there's no way that I'm
gonna stay in the marketplace
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just to make that $4.75, an extra quarter
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and still have all the
risk of the trade on.
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So if this happened early,
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I would definitely look to get out.
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If I'm in the market and this
was on the close on the 10th.
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Now we did have the big down day,
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and if anything, that should
have definitely shook you out,
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because then we had the
market bounce back up
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and it's still above our short strikes.
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So if you were thinking,
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this mark is just gonna continue,
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and all of a sudden you have
the shock in the marketplace.
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Well, now if you haven't gone out,
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you definitely deserve the
stupid award for that, all right.
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So if you fell asleep,
you put the trade on
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on Monday on paper.
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And when we have paper trades,
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we don't follow them
as much as real money.
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I agree with that.
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And all of a sudden, you wake up today
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and the market's down around 237.
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I wanna quote this because
something else really happened.
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And we mentioned this a little bit,
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and all the stock play other days.
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We finally had the VIX
index, the volatility index,
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the fear index if you will,
come back down below 30.
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All right, so that's where the VIX was at.
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The VIX was right around 25 if I recall
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on Monday when we did that trade.
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All right, well, these big drops
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really scared investors overall.
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They kind of got blindsided on it
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and it's almost like they were in a dream
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dreaming about the market's going up
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and then all of a sudden, wham!
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What just happened.
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And because of that, people were running
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to the option marketplace,
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and this is where options
really work as protection, okay?
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So I'm gonna actually show you
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before we go and look at the
trade and the price right now,
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I'm gonna show you what happened
to volatility in the VXN.
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Okay, the VXN is the NASDAQ volatility.
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It's calculated very similar to the VIX
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in the S&P 500 index.
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All right, so now if you
scroll down, you'll see
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this was where we were at.
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Once again, I drew a
segment for Monday at noon
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when we we're putting the straight on.
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And the VXN was down around
26, at that point in time.
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Now look at what happened
to the volatility
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over the life of this.
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And we did have the Feds speak,
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but volatility just slowly increased,
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even when in the up markets
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we saw implied volatilities increase.
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And that's a lot of times a sign
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when you're getting an up market
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and you're getting increased volatility,
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that means the fear factor is coming in.
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And then you price it in
with a little bit of people
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being a little bit overbought,
and we see what happened.
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So if you put the trade
on, on Monday on paper,
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you came to Brian's stock
play of the day over time,
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and you just said, "I'll
look at it on Friday."
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Well, guess what?
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You're still okay on the trade, why?
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Because implied volatility helped us
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even know the VIX index,
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I'm sorry, even though the
NASDAQ, the QQQ came down,
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and now it was below our strike prices
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on our long call spread.
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So summarize real quick like
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before we get too long in the truth here.
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We put the straight on for $2.40.
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The market right now at this moment,
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we're taping live on stock
plan of the day over time.
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It's 237, it's two points below
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where we actually put the trade on.
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But we're only down about,
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I'm gonna call it 27 cents
on this entire trade.
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So what would I do right now?
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Well, I would take advantage of that
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high implied volatility.
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If I was down on this trade
and I got the weekend coming
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and I have a lot of time
to Kate and I fell asleep,
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I'd be like, all right,
I got lucky per se,
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that the implied volatility
increased as much.
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And if I'm wrong on my forecast,
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I want values to go up
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to help me with my long option contract
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to raise that valuation.
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So because of that, this trade
is only down about 27 cents.
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I would close that trade
and move onto the next one.
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All right, that's it for this edition
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of the stock play of the day overtime.
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We're gonna be back on Monday
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for the actual stock plan of the day.
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Please click, subscribe,
and ring the bell,
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so you get all the alerts.
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Thanks for coming.
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