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Bearish Credit Call Spreads in QQQ and SPY with breakevens near the highs.
2 min read

Bearish Credit Call Spreads in QQQ and SPY with breakevens near the highs.

Bearish Credit Call Spreads in QQQ and SPY with breakevens near the highs.

The market is seeing in first big down day in quite some time, and with that has come a spike in implied volatility (VIX near 30). For those looking for some bearish positioning it may make sense to look at credit call spreads in lieu of puts, with breakevens on those credit call spread near recent highs

Let's start with the QQQ, which is down about 4% today. Using a bearish price target on Options AI technology with an October expiration we see one of the strategies is a -290c/+314c credit call spread, the breakeven is important here, near $300 in the underlying:

The recent highs in QQQ were just above the 300 level, nearly $304, this credit call spread breaks even near $300 with a max loss level substantially higher ($314) than the recent highs. That gives the trade plenty of room.

The risk reward on this trade is about $1450 to make up to $950 with a max gain at or below $290.

With the spike in volatility from the low 20's in the VIX to nearly 30, this is one way to take advantage. And it has the added benefit of a breakeven near recent highs. If the market were to continue lower and implied vol increased there would be worse problems to have for a winning trade. And if the market bounced and approached recent highs, volatility should come in, which would help lessen any short delta losses. And time is on the trade's side (theta) as long as the QQQ is below $299.50.

Applying the same logic to the SPY here is similar positioning, with a -348c/+367c credit call spread:

This credit call spread has a breakeven at $355.60 in SPY, its recent highs (yesterday!) were about $358

This type of strategy can be used outright or as a market hedge. As a hedge the protection is limited obviously, as the most that can be made is the premium collected, but that's not nothing. And the higher probability of this trade versus buying puts or put spreads is in its favor.

Strikes and timeframes can be played around with to find the right fit but the key here is that implied volatility has already spiked even before today's selloff and the breakevens on these trades are near the very recent highs in the market.

Previously:

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