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Was asking about the trade watch, but you just updated it. Thanks.
So, we consider this a correction but not a bigger one, considering QQQ will breakout to $511-$516 range, and we do anticipate a bigger correction sometime later. If it doesn’t push itself above $511, we can have another leg down to more than 7%(maybe between 8-10%) correction point? Is my understanding correct?
So the way to think about the market right now is like this. There’s a gap line between $511 and $516. Somewhere in that range. I’m not sure on the price values, but it’s there on the chart. If the QQQ starts to fill that gap, chances are it will push through and fully fill the gap. If it fills the gap up to $516, the rebound will have gone too far making it unlikely that we get any real sell-off in the future. Why? Because this would mark the THIRD up cycle. Notice none of this is normal. IN most normal situations, we get a pul-back, MAYBE a retest of the highs ONCE and then a correction. We don’t get three tests like this. That’s not the typical topping process we normally see.
And each time the market rebounds hard off of the lows is yet another indication that the buyers are strong and confident. If every time the market pulls back or begins to pull-back, buyers step in, then the supply/demand imbalance is still on the buy side.
Corrections happen because that balance shifts for any number of reasons. It hasn’t shifted yet is the point. And if we get one more strong push up, it’s eventually just going to break in the up direction.
Each cycle up/down has increasingly higher probability of breaking in the current direction. The reason we didn’t want to see the QQQ push above $511 is because above those levels we have a clear-cut up cycle. But at a $511 peak, we’re still technically in the down cycle that started at $527 if that makes any sense.
At $511, this is just a small rebound within the overall down cycle that started at $527. Any higher and we have a new up cycle.
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The reason we want to see a full blown correction is (1) it provides opportunities to trade long; (2) it reduces the overall risk when the market begins a new rally. If we don’t get a full correction, then while we rally up to $600 a share on the QQQ, there’s going to be an undercurrent of risk/worry/concern that hte market hasn’t really sustained a real correction and that one could follow at any moment.
The last rally we had between April and June was just like this. The April correction didn’t go far enough and the entire rally from April to June had a big undercurrent of risk underlying the whole move up. And that risk was well founded because the market crashed 16% right after.
We’d rather just see a 10% sell-off here, a nice normal 20% rally to $600 followed by another correction in summer. That would be ideal.
Is there a difference from a straight call and doing a spread like 125 135 if the values of both go up? I guess the spread is lower value and so it’s customizable for quantity and sees less gains on a explosive run up?
Sometimes. You need to do some math to figure that out. But generally speaking, here’s the way to think about each type of strategy — calls versus spreads.
A straight call, generally speaking, will appreciate more on the initial surge. And they give you the potential to be able to sell weeklies against the position. So right now we own the Nvidia March $130 calls right? Suppose Nvidia rebounds to $140 and we think the stock might stall out a little. We could potentially sell that week’s $145 calls for a decedent amount of money — say $3-$4 and we get that additional premium if Nvidia doesn’t close north of $145 for the week. And even if it does close above $145, we collect the premium and we get the total return for the rally from $130 to $145. You can’t do that with spreads. You’re locked in. Calls are generally a bet on a near-term surge in the stock price.
Call-Spreads, on the other hand, are a bet on a particular price-target outcome at expiration. Now call-spreads also appreciate pretty rapidly on a rally. But they get their full value at expiration.
The $125-$135 call-spread reaches its maximum value if Nvidia is north of $135 AT March expiration. At March expiration, they’re worth $10.00.
The march $125-$135 call-spread is worth $5.00 right now. If Nvidia were to rally to $150 in the next week or so, they probably go up to around $7.20. So that’s a good 44% return on a run-up to $150.
The March $130 calls we just bought at $12.75 would rally to $25.00 being $20 in the money. They’d have about $5.00 in premium build in depending on time remaining to expiration. That’s a 96% return versus a 44% return. Even if the spreads trades al little higher at 55-60% return, it’s still a wide difference right.
But notice that the $125-$135 call-spread — which is now $15 in the money — will rally to $10.00 as we get closer to March expiration. So long as Nvidia doesn’t pull back to $135 again, those will close with a 100% return. What’s more, each day that passes by and Nvidia is trading $15 in the money, those spreads go up in value even if Nvidia trades slightly down or sideways from $150. As long as they remain in the money and time goes by, they appreciate in value.
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So you see the difference? If Nvidia rallies to $150 super early with 30 days remaining to expiration, the calls are a much much stronger bet. Why? becuase you collect the full return right then and there. The spread will require you to either take the smaller return at 44% OR you’d have to hold that spread for another 30-days with the risk that Nvidia could pull back below $135 over the next 30 trading days.
This is why we say a spread is a bet that a stock will trade above a particular price at a particular date whereas a call option is more a bet on an immediate direction.
There are circumstances where putting on spreads is a lower risk strategy. Consider this for example. Think back to the August lows when Nvidia reached $90 a share.
At those levels, Nvidia was trading way way below any reasonable price. Chances are at all points in the immediate future, Nvidia is going to trade well north of $100 a share right. At correction lows, you can make a bet on a slightly out of hte money call-spread that returns 100% so long as the underlying returns to normal trading ranges. You could have even bet on the $80-$90 call-spread — which likely returned 80-90% at the time and all you would need to happen is for Nvidia to stop dropping. It wouldn’t even need to appreciate at all. As longs it just stayed above $90, you’d make an 80-90% return.
That’s the entire point behind the Targaryen Portfolio. The Targaryen portfolio makes selective bets when stocks reach undervalued levels such that there’s a high expectation that the stock will maintain trade way above current trading levels.
We’re getting to that point now in Apple and Netflix. With them both reaching a 30-RSI, there’s a good probability that both stocks trade far north of their current levels in the next few months. Hence why we’re looking at spreads for both.
With Netflix, we have to stick with spreads because calls are simply too expensive. It’s like $50 for 1 single call option at any reasonable level. Spreads reduce the cost of owning a call.
So with Netflix, we’re making price-target bets. with Apple, we’ll be doing the same in Targaryen. Making intermediate-term bets on Apple’s price-target a few months into the future.
Thanks very much for this it clarifies the risks for the different strategies. How I was thinking of it was if there is a risk of breakdown because we aren’t deeply oversold on Nvidia there is a chance for a call to fall much farther in value than a spread. With the spread then there is a chance to cover some of the position and leave 2 calls on the low side (eg here is 125) and buy back all the calls on the high side locking in a premium there. it’ll serve as a pseudo hedge. Im not sure if my math is correct and would like a sanity check. Here is what I am thinking: Buy 6 spreads 125-135 at $5 and then if Nvidia goes down further keep 2 of the 125 calls and sell the 4 125 calls and buy all 135 calls.
I think it wastes some commissions paid for the trade and overall just better to buy calls and buy more at a lower price .
(12h00) QQQ almost reached 2 standard deviations below it’s opening price. At this point, there’s 93% probability that it moves higher.
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