Trade The Journey

Trade The Journey

Trade Review: Week of June 17, 2023

Trade Execution: Improvement reigns supreme

This past week I decided to jump on the bandwagon and ride the wave on the Nasdaq higher. The Nasdaq headed higher on a strong trend buoyed by the enthusiasm for artificial intelligence. The chart pattern seemed a little intimidating by the angle it took to reach new highs.

My first thought was that this trend would be coming to an end soon, but I’ve learned over time that picking a top or a bottom is a fool’s errand. I had a couple of choices on how to trade the Nasdaq. I could trade stocks within the index or trade the index ETF based on the Nasdaq 100.

I chose to place a trade with a bullish outlook on the index ETF. Since I map out reference levels for the indices on a weekly basis, I thought it best to use these levels as my basis for trades. I’ve done moderately well on my index ETF selections.

This past week, I decided to place a bullish call debit spread, meaning that I brought a call and sold a call at a higher price. The purpose of this trade is to limit the risk and costs of a bullish outlook. Purchasing an outright call option could result in the total loss of premium. At the time, a QQQ call option was trading at close to a $3 premium.

The week before last, I got burned bad playing QQQ for a neutral outlook due to the lack of data released. Even though the trade didn’t turn out as expected, I found $356 to be a solid resistance level. QQQ had bumped up against this level but had failed to break through. I needed a catalyst, and this past week had a lot of catalysts to cause QQQ to move.

The biggest catalyst was the Feds rate decision and resulting press conference. In my experience, trading on the day of a rate announcement is risky because of the uncertainty regarding market participants’ reaction to the conference. I’ve seen the market rally on the initial announcement and precede to sink as the press conference commenced.

Luckily this time I was on the right side of the market.  The vertical spread greeks change as the spread moves into the money as follows (Text not bold summarized by ChatGPT):

  1. Delta: In a bull call debit spread, the overall delta of the position is the net delta of the combined options. The long call option has a positive delta, indicating that it benefits from upward price movements. The short call option has a negative delta, partially offsetting the positive delta of the long call. As a result, the overall delta of the spread will be positive but lower than that of a long call option alone. This means that the position will experience smaller gains for each point increase in the underlying asset’s price compared to owning a single call option. The delta although smaller than outright call option position will remain positive.

  2. Gamma: The gamma of a bull call debit spread is typically lower compared to owning a single call option. This implies that the rate of change of the delta will be slower as the underlying asset’s price moves. Gamma decreases as the underlying asset’s price approaches or exceeds the strike price of the short call option. The lower gamma of the spread indicates that the position’s delta will be less sensitive to price movements compared to owning a single call option. The gamma will turn negative as the spread becomes in-the-money, meaning the spread will be hurt by movement in the underlying.

  3. Theta: Theta measures the time decay of an option’s value. In a bull call debit spread, the long call option has a negative theta, indicating that time decay works against the position. The short call option, on the other hand, has a positive theta, which partially offsets the negative theta of the long call. Overall, the spread will have a smaller negative theta compared to owning a single call option. However, time decay will still erode the position’s value over time, so it’s important to consider the impact of theta when trading vertical spreads. The theta will begin to turn positive as the spread becomes in-the-money, meaning this spread will earn time value similar to selling a calling option.

  4. Vega: Vega represents the sensitivity of an option’s price to changes in implied volatility. In a bull call debit spread, both the long call option and the short call option will have positive vega. However, the vega of the long call will be higher compared to the short call due to the closer proximity to the current underlying asset’s price. The spread’s overall vega will be positive but lower compared to owning a single call option. This means that an increase in implied volatility will have a smaller impact on the spread’s value compared to owning a single call option. The Vega will turn negative as the spread becomes in-the-money, meaning that the position will be hurt by movement in implied volatility.

 The details of the trade are as follows:

Trading Asset: QQQ

Option Strategy: Bull call debit spread

Legs of Option Strategy: Buy a $356 call and sell a $358 call

Expiration: June 16, 2023

Risks: $0.96

Potential Profit: $1.04

Technical Story: Resistance at $356. Strong trend with the ADX above 30. The RSI was mostly above 70.

Trade Review upon day of the close:

I would have to say that this is my best trade although my entry was a bit higher than originally intended, I got in. This trade was basically successful from the start, my only adjustment would be to gauge the volatility for the index and widen out the spread based on it. Going into the Fed announcement, I felt confident because the price of the ETF was well above the call I sold but it wasn’t out of the realm of possibility that QQQ could sink over nine dollars as I’ve seen it happen before.

I put on some closing trade limit orders but took them off and decided to wait for the announcement and press conference to see if I could capture the full premium. The reason this trade worked was not because I knew what would happen. Instead, I had a resistance level that it could break through and  the announcement could be the catalyst needed to breakthrough resistance and luckily it was. I felt comfortable while I was in the trade.

Lesson: Seven times out of ten, or maybe 75% of the time a trade that works will work quickly so there’s really no need to stay in a trade if it isn’t working.

Technical Story:

Daily Chart: QQQ

15-min Chart: QQQ

GREEKS monitoring spreadsheet: QQQ

New scenario page (In development):

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