New Trade Alert for (QQQ)
Buy PowerShares QQQ March $110 Call @$9.00 or less
Risk Rating: 3 (1 = lowest 5 = highest)
Above Break Even Probability: 49%
Max Loss Probability: 12%
Rubber Band Snap Back TECH Attack
A tale of two markets has the S&P and DOW major market indexes continuing the epic rally run more than 25% off the February lows with repeated new highs in the past days and weeks. The relief rally has left behind tumultuous Tech that has not seen the tip top since waaaaay back October 25th now six long weeks ago.
The Nasdaq advancement stopped in its tracks as attention has shifted more to industry than innovators. A short term shift saw money flows go to long neglected DOW stocks to produce DOUBLE DIGIT gains in Blue Chips for 2016.
S&P 500 broad market measure has surged in the last few weeks with YTD performance at plus 9% with less than a month to go this year.
Compare that to the QQQ Nasdaq up only half of that AFTER this bounce to plus 4%. The snap back potential has the reward to risk in favor of the bulls after backing off.
The BIG BOYS of Apple, Microsoft, Facebook, Amazon, and Google account for 40% of the weighting in the QQQ index. This pullback in these OUT performers can be positioned with QQQ PowerShares for a second chance charge.
QQQ pause has trade tracking from $114 to $120 since August. The summer breakout above $110 can be leaned on as a critical uptrend support point.
Currently trade is just at the $117 midpoint of the four month channel with a burst above a signal that another attempt attacking the highs is likely.
The larger technical objective is $126 as the measured move target from the distance of the channel trade on top of the $120 resistance. An 8% potential pop is an opportunity to use the power of options for a capital preserving stock substitution strategy.
The March option has three months for Bullish development.
An In-The-Money option gives you the right to be long from a lower strike price and it costs much less than the ETF share itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A QQQ PowerShares long call option can provide the staying power in a potentially larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares, that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for a gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from just modest directional moves.
Any trade has a fifty/fifty chance of success. Buying In The Money options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it. The chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With QQQ trading at $117, for example, an In The Money $110 strike option currently has $7.00 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right, but only after the option has expired premature to the market move.
Trade Setup: I recommend the QQQ March $110 Call at $9.00 or less.
A close in the stock below $112 on a weekly basis or a loss of half of the option premium would trigger an exit. Notice the $110 strike has the right to be long from a discounted level last seen in July.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta of this $110 strike is 77. That also approximates the probability that the option will be in the money at expiration.
The March option has nearly three months for bullish development, with the right to buy at five month lows.
The maximum loss is limited to the $900 or less paid per option contract with an exit stop loss at half the option premium to reduce dollar exposure. The upside, on the other hand, is unlimited.
The QQQ option trade break even is $119.00 at expiration ($110 strike plus $9.00 or less option premium). That is two dollars above the QQQ current price.
A push above the $126 objective would put the option value at $16.00 would nearly double the original investment.