Tuesday, April 19, 2011

Still Bearish QQQ going into end of QE2!!!

As I commented on my previous trade that I closed out, I mentioned that I would be looking to get back into a trade in the QQQ to the short side using June options. Today the VIX has pulled back a ton, giving back all the gains from just a day ago. So I sold 10 Jun '11 57/58 callspreads for $0.45, or $450. I also bought 20 Jun '11 Quarterlies/ Jun '11 Calendars -->buying the quarterlies and selling the Jun regular expiration options. I put these on for $0.21 debit or a total, $420. So my total risk for combined positions is $970, with total upside of about $1650.

Above is my aggregated risk profile.

I like the calendar using the $55 strike because I still have a target of around $54-$55 on the QQQ and I like the additional upside for an uptick in Volatility. So I may peal pieces of this off on any spike in volatility, which I think we will be seeing more of as we move closer to the expiration of QE2. I sold the callspreads to finance the calendars, but also sold them believing that QQQ will not get above the downtrend line that I have drawn in the above chart. I would probably close this position if we breach and close above my trendline on a daily chart.

I will keep you guys posted.


  1. Dominic,
    Thanks for sharing and good luck with your latest trade. One question/comment - why did you choose the Jun/June quarterly dates? Your short/long options are separated by only 13 days - the problem I have found with trading calendars like that are so close together is that you don't get any differential theta decay until the very end. For example if you did May/June you would see a theta differential of a penny right now and that would increase as we got closer to expiration. Jun/June quarterly, however, will have the same theta (so a net zero) for quite awhile.

    I came to this realization after trading weekly/monthly calendars. When you had a 3 week separation you got decent theta, 2 weeks was a little worse, and once it got down to trading a 7 day option against a 14 day option it wouldn't move until the very end of the week even if the stock price was very close to the strike.

    I know you are aware of all this but it's a good thing for some less experienced readers of this blog to consider when making a trade like this.

  2. Well my thesis did not hold well...QQQ gapped well above my down trendline and I closed out both the calendars and the callspreads for a loss of -$240. I am more than ok admitting I am wrong.

  3. Dominic,

    I like how you illustrate your trades. The title of this post caught my attention, I am personally considering getting long QQQ. Time will tell if it works out.

  4. Hey Sandeep...I was not really looking for the theta burn with this calendar that I put on. I was really just looking for a move up in volatility and downward movement in price. But I was obviously wrong after QQQ gapped way above my exit point on the down trend line.

    But you do make an excellent point that the theta between both the options that made up this calendar would have very similar theta, the front would only be slightly higher and that would not be noticeable until we got closer to expiration.

  5. Trin Cafe...Let us know what you decide to do on QQQ and why if you don't mind sharing.


  6. I have been tinkering with the idea of buying QQQ at 58 while simultaneously selling a 58 June Call. Forgive me if my logic appears to be skewed, it wouldn’t be the first time; none the less, I’ll try to explain.

    I want to be long QQQ for the next couple of weeks/months, but I want to protect the downside to being long so I sell an in the money June 58 call. From what I see, the risk is the underline going down below 56.33 at which point I will be sure to close the underline position and may consider getting short; now if it gets called away from me, I will be content with the credit to my account and may even consider buying the underline back again.

    I honestly dont intend on hi-jacking your post, I go into more detail on my blog Trincafe.blogspot.com

    Your suggestion and analysis is appreciated.