Friday, August 19

QQQQs in the short term; bad moon rising.

The Nasdaq, here represented by the qqqq's, looks ready to make a run up to test the yearly high near $41.

But coming at this time of year, in this interest rate environment, and during the first year after a Presidential election, The odds are...that it will fail.

The recent correction during August has been accompanied by the increase in implied volatility that one expects to see when a stock heads south (yellow line). If the Q's do rally from here, implied volatility will again decline offering up a great opportunity to the straddle or put buyer to buy cheap vol going into the traditionaly stormier seas of September.

Front month implied vol on the Q's is currently running about 14 which is not a bad buy in itself, historically, but should it get down to around 10 again within the next few weeks, it would be a screaming buy.

If one wanted to trade this scenario immediately, one could SELL the Put spread Oct 38-39 for about a $.40 credit. Then when the market tests the new highs in the next few weeks buy back the short options (the Oct 39 puts) with the lower implied vol--for about $.30, leaving you long the Oct 38 puts for a net CREDIT of $.10.

Though there aren't any sure things in trading options, getting long vega and gamma that cheaply in this market environment is a solid bet, leaving one open to the small probability of a big payoff.

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