Monday, August 5, 2024

Real Money, Real Trades: What To Do in Unknown Markets

In my telegram channel on Friday, I sent out a free trade idea to everybody on pairing the QQQ with the SPY. Long one, and short the other.
 
   
     
   
   
Real Money, Real Trades: What To Do in Unknown Markets

In my telegram channel on Friday, I sent out a free trade idea to everybody on pairing the QQQ with the SPY. Long one, and short the other. 

The idea behind that trade is that sometimes we get into these markets where you just don't know. You don’t know what area or sector is going to pop, or what specific stock will pop, or where the markets are headed.

But the reality is that sometimes the market is moving fast, you don't have a prediction, but you still want to take advantage of a fast-moving market because, obviously, the volatility represents a significant opportunity. 

And one of the ways I like to play this scenario is almost like a hedge by pairing two assets together. 

It’s really simple: go short on the asset that's getting hit harder and go long on the asset that’s holding up a little bit better. 

In this case, it was the QQQ vs the SPY, we went short the QQQ and long the SPY. 

Again, this is a trade I gave out for free on Friday in my free Telegram channel:
 
 
Don’t worry, I’ll show the results of the trade in just a moment. But first I want to discuss this trade a bit more. 

Here’s what to understand about pairing a long and short together like this: If there is a high degree of possibility that you're going to get a big move, then that means you're likely going to take a hit on one side. 

But with the short-term options, they can run up to triple-digit gain so quickly that the winning side will overtake the losing side if you get a big move in either direction.  

Let’s say Apple’s stock jumps up 3%. A short-term option on Apple that expires this week will likely increase triple figures in value, while an option that is set for a month out will move double figures.

In fact, our QQQ/SPY trade was up nearly 100% in just the first 40 minutes after I posted about it! 

Then we had a massive gap down this Monday and it drove the short option on QQQ up nearly 400%.

So, this strategy gives you an opportunity to trade even in an uncertain market. And sometimes that’s the best thing to do. Just give yourself an opportunity to use the overinflated change of values on short-term options to your advantage. 

When you're in an unknown market, but you have a high degree of probability in continued volatility, this is one strategy you can turn to. And the simplest way to do it is to look at the indexes and pair the strongest index and the weakest index. 

 If we get a big further collapse, it should put the puts up significantly.  If we get an aggressive bounce back, which we've seen a ton in this market, it should pull the calls up significantly. 

And either way in that situation, you're in great shape. What you have to avoid is the market is grinding sideways and trading relatively flat because both options will lose value in that scenario. But we haven't really seen that kind of reaction to big breakouts lately. 

We've either seen big bounce backs or deeper corrections.

So, how did our trade do? 
 
 
This one was a home run (I closed this morning but am looking for another chance to jump back in).

And this strategy is a variation of what I call Profit Pairs which we talked about last week. Except for in this case, instead of pairing two stocks together, you're actually pairing indexes together as a hedge looking for a big move in the broad market in either direction. 

Some indexes to consider are the Dow, the QQQ, the SPY, the Nasdaq, etc. For small caps, I’d take a look at the Russell 2000 or the S&P 600. 

Or you could even trade some of the sector ETFs such as these which are all down pretty bad today:
 
 
One way to do this would be to look at which one's been the weakest and which one's been the strongest lately and pair those up together and then use the short-term options (one week out options at the most, sometimes even 2-3 days out). 

The key is that you want the change in option value to be very inflated because you have to overcome the losing side of the pair and, often, even a 1% move can create a triple-digit return on short-dated options.

I hope this is useful and, if you’re in my Telegram, I hope you traded this one!

- Nate Tucci 
   
 
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