Options Trade #24 - QQQ Long Put Spread

Updated: Dec 6, 2018

VTS Community,

Interesting question today from our friend Maajid:

"Why don't we ever gamble with options trades?"

I think this can be interpreted in two ways.  If by gamble you mean take trades that have virtually no chance of succeeding, but if they do happen to succeed we hit it big, then the reason we don't do that is that it's completely unnecessary to throw money away.  We don't need to gamble to make a great rate of return.  This is why I don't buy lottery tickets.  I would much rather put in the hard work myself, control my situation, and guarantee the outcome I want.  And likewise, I prefer to take higher probability trades because if you do enough of them, in the long-run it virtually guarantees success.

If by gamble though you mean take lower probability / higher reward trades, then the answer is I sometimes do, I just haven't yet in the Discretionary strategy, because they have to make sense.  I don't do long shots, but I don't see anything wrong with taking a few trades with a skewed probability of success.  If we keep the allocation very small there's nothing wrong them.

Let's do one today  :)

Nasdaq-100  (QQQ)  in 2018:

What if we start with the premise that after the midterm elections this volatility will calm down, and fund managers who are having an absolutely brutal year thus far will feel the need to run up the stock market to save their annual report?  It's not that far out of the realm of possible right?  And if that were to happen, I bet the QQQ's could take a run at their all-time high.

Let's do a simple trade which I consider "low probability" but has an attractive risk/reward profile.  The VTS Discretionary Options model portfolio is currently at 26,061.38.  Let's risk 1% of that on a January 2019 trade.

The Trade:Long Vertical Call spread on QQQ

Buy to Open 3 x 18 Jan 19' QQQ 180 Call Sell to Open 3 x 18 Jan 19' QQQ 185 Call Debit:  ~ 0.87 Days to expiry:  80

* prices move around, so just get the highest premium you can.  I've seen it as low as 0.78 and as high as 0.88 this morning so the lower the better.

Margin Requirement: 1 option contract  =  100 shares The margin requirement for a long Vertical is the maximum loss (0.87  *  100)  =  87.00$ per contract Model portfolio is opening 3 contracts, so 261$ required For directional trades, I like to keep the allocation very small

The VTS Discretionary Options model portfolio is at 26,061.38 261 margin is 1.00% of the portfolio

* You can scale your trade to roughly 1% of your VTS Discretionary Options funds

Stop-loss: For these kinds of low probability trades, I typically consider them "set and forget."  I don't ever take these trades if I'm not 100% ok with losing the entire trade.  If we lose 1.00% in January, I'm completely ok with that so it passes the test and we can put it on and see what happens.

If markets recover quickly we may take the profit early, but otherwise, we'll just tuck this one in our back pocket and see where it's at in a couple months. 

If it pays off, it'll be that feeling of finding 20 bucks in an old coat  :)

Today's SPX Iron Condor

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