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The PowerShares QQQ Trust (QQQ) is the unit investment trust that attempts to perform in price action as that of the Nasdaq 100 index. QQQ options markets are very liquid and tightly bid and offered. Even better, I now see the QQQ as coiled. It should soon make an attempt to move out of its recent range, possibly breaking out to the upside which is my bias as we move into earnings season for the market.
You might want to go to Yahoo! Finance or Google Finance and look at a long-term chart on QQQ. You will see that $60 is a serious level that has been a ceiling on top of QQQ for over 10 years now. Thus, should QQQ take that $60 ceiling level out, the upside fireworks could get fast and furious.
Before we get into the setup and options strategy, let's take a look at the T3/OP video with Jill and Scott as they review the fundamental and technical case for a trade in QQQ.
While I think it is only a matter of time before QQQ takes out $60, we who deal in the options world are very keen to time as well as price. In fact, it is the effect of time more so than price that dictates most of my trade setups. This is why I harp on controlling the risk in most trade setups that I post to our site. Having a coiled pattern is a valuable asset in attempting to find value relative to the time involved for any options trade. Reading correctly the price direction where the underlying comes out of the coil is the art of the trade and where the most risk is found.
Slowly but surely the market is entering into that phase where things might be felt to be "dull". The smacking of the CBOE Volatility Index (VIX) over the past few months is my proof for that sentiment. But going back to the ageless playbook for traders what pops into my aging head is: "Never sell a dull and rising market short." I highlight "rising" because most pundits and collective financial genii tend to leave that out.
Consider a bullishly biased vertical call spread in QQQ, expiring in April. This trade is medium in risk because the risk is totally controlled, while medium in reward since it is a hedged trade which caps the potential upside gains.
Trades: Buy to open 3 QQQ April 58 calls for $2.30 and sell to open 3 QQQ April 63 calls at $0.40.
The total risk for the spread is $1.90 points, or the premium paid for the spread. As always, I will monitor the trade on this site in the comments section below.
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