Trade The Journey

Trade The Journey

Trade Review 7-30: QQQ Bull Call debit Spread

This past week I decided to open a bull call debit spread on QQQ, which is a invesco Nasdaq 100 ETF. The top ten sector holdings of QQQ are Apple, Microsoft, Amazon, Nvidia, Meta, Tesla, Broadcom Inc., Google, and Pepsico. The order is based on weighting. QQQ is heavily weighted towards techology at 57.05% with consumer discretionary having a sector weighting of 18.67%. The remaining holdings are below ten percent.

As earnings season continues and inflation is preceding to moderate further, the bulls have returned eager to capture a part of the run-up. This past week, Microsoft, Google and Meta all reported earnings and revenues that beat forecast. Overall the tech sector has been performing well especially with the rise of A.I.

Usually, I invest close to 2-3 hours preparing for a position, however for this trade I did not. I opened the trade first and recorded the trade in my trading journal afterwards which wasn’t ideal. In addition to the earnings being released this past week, the rate decision, PCE, initial claims, and few other market moving reports were being released. The Nasdaq had a reference level $14,177 that had been tested this past week.

QQQ had a support level at around $375 and the 20 SMA moving average was close enough to serve as a dynamic support level. Personally, I thought that there was enough data being released this past week to move QQQ either upwards or downards depending on the economic data and earnings reports. QQQ was a basically in a minor sideways trend and I though there was a good possibility that QQQ could make a new high with multiple catalyst.

Trade Strategy: Bull Call Debit Spread

First leg of spread: $377 Call

Second leg of spread: $380 Call

Expiration Date: 7-28-2023

Premium Paids: $1.50

Premium Received upon closing: $2.50

This call was slighlty in the money when I opened the trade and was pretty much profitable from the start although I faced some turbulence towards the end of the week. Consumer confidence returned and the market seemed confident that a soft landing is entirely possible. It also seems like the Fed may be nearing the end of its hike although it has pledged to keep a tighter monetary policy to bring inflation back to its 2% inflation target.

Towards the end of the week, I faced an interesting situation where I had a choice concerning my options position. During the week, QQQ made a nice high of around $383-384 and I had the opportunity to close the postion with a nice profit. I thought about it but greed got the better of me and I decided to keep the position to see if I could capture the entire option premium.

That very same day QQQ reached $384, Japan surprised the market by annoucing a possible change to its yield curve control policy, allowing the ten-year yield to fluctuate another fifty basis points. Based on this annoucement, the market sold off and in a matter of hours I had a losing position on my hands. Watching the charts, I saw that QQQ had drifted towards $376 which was a small support area.

The option premium drifted dangerously close to my stop which was $1.10 and I considered closing the position. I was waiting to see how QQQ would react around this area and luckily it never broke below the $1.10 or $376 decisvely so I decided to keep the position open for another day. I watched QQQ performance after the market close and its seemed to be resuming its upward trends.

The next morning QQQ opened around $381. I had another decision to make, leave the position open and see what happens or take the profit and close the position. Instead of putting the performance from the previous day behind me and trading the day, I kept the memory of a profitable trade turning into a loss at the forefront of my consicousness and quickly closed the position.

Had I would have kept the position open until its close which was also the expiration date of the option position, I would have realized a full profit. Slowly but surely, I’m working my way to recovering from the drawdowns I experienced a few months ago and am nearing a return to profitability.

Trade Review upon closing the Position:

This was a tricky trade that required some discipline and some paitence. For this trade, I pretty much opened the position on a whim, without doing much analysis. So I was prepared to close the trade early if things didn’t work out. However, the trade worked and it worked pretty quickly. At the end of the first day, I had a profit of $100 and I had the opportunity to close the trade several times but I decided to keep the position open to see if I could capture the full premium. The second day it seemed like the plan I had would work as QQQ made a recent high of $384, but just an hour later QQQ fell sharply on the news that Japan may end its yield curve control policy. I started to kick myself for not closing the position but now I know better, it jus’t didn’t work out as planned.

The second day, I ended with a loss. I had a mental stop loss of $1.10 which amounted to a $40 loss and while QQQ reached this level and dipped a few points below it didn’t stay there. Before the last day of the trade, I saw QQQ rising after market so I thought things could be good on the closing day. Unfortunately, I woke up about ten minutes late and the position had returned to the original profit level on the first day and I quickly closed it. I wish I wouldn’t have gotten up earlier and had more time to think instead of closing my position while still half sleep. QQQ closed at the original high reached on the first day of the trade. I left a big portion of the profits on the table.

Lesson: Don’t be afraid of the market. I had some fear from the second day and I thought that leaving the postion open again could cause me to face the same fate as the second day, uncertainity. Trading is tough because each day is unique and instead of treating the day as such, I let my past memory of a profitable trade turning into a losing trade cloud my vision. In trading, a trader much have a short memory and treat each day as its own.

 

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