The major averages all printed new all-time highs this week, driven by renewed optimism after a slightly cooler-than-expected inflationary report. Despite the continuation of Federal Reserve policy uncertainty, investors remain positive and seemingly still believe that a “soft-landing” is still achievable. I am somewhat in that “believer” camp too. However, I also believe now is a prudent time to implement a hedge. I want to focus on the Invesco QQQ Trust (QQQ) tracking the Nasdaq 100 as the majority of this year’s gains in the S & P 500 are derived from Magnificent 7 constituents. The tech-heavy Nasdaq 100 has more beta than the S & P 500 and has the potential to increase rewards if this downside protective trade pays off. Remember volatility moves markets both up and down. A CBOE Volatility Index at 12 seems a little too complacent as we make new U.S. equity records on a weekly basis. Using technicals to guide the strike prices I select, $437 in the QQQs is the 50-day moving average, with its 200-day sitting way down at nearly $400. I don’t foresee a scenario where the 200-day average is violated short-term, but a test of the 50-day metric is plausible. This trade is looking for roughly a 5% pullback to cover the cost of owning this put spread. The Trade Bought the 6/28/24 $437 put for $3.50 Sold the 6/28/2024 $420 put for $1.45 Total cost of this debit spread is $2.05 or $205 per one lot spread In the event the Nasdaq 100 continues to make new all-time highs, this spread will expire worthless But hopefully the Nasdaq 100 exposure you have in your portfolio will more than cover the cost of this hedge. Insurance costs money but by buying put spreads in the QQQ we have deferred some of the cost in owning it by selling that $420 put. DISCLOSURES: (Kilburg owns this spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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