Will the Nasdaq Pull Back next Week?

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Is the Nasdaq headed for a selloff next week? Someone seems to think so.

Here’s a breakdown of the massive bearish put spread that appeared yesterday in the PowerShares Trust (QQQ) that tracks the Nasdaq-100 index:

  • A block of 50,000 10-August 173.50 puts were bought for $0.91.
  • A block of 50,000 10-August 172 puts were sold for $0.61.

Remember that owning puts fixes the price where a security can be sold — in this case it would be at $173.50. The other half of the trade, writing puts, generated income and set a level where they’d have to buy the stock. In this case it would be $172.

So, sell for $173.50, buy at $1.72. They’d collect $1.50 from QQQ sliding to $172. What’s so great about that?

They only paid $0.30 ($0.91 – $0.61), that’s what. So they stand to earn a potential profit of 400 percent from the underlying declining less than 3 percent. (Without a drop the position will expire worthless.) There’s a reason why people use options! Visit our Knowledge Center for more.

Fears about trade wars with China drove QQQ lower early Thursday, but turned higher as stocks like Apple (AAPL) and Tesla Motors (TSLA) advanced. The put-spread buyer returned to the market in smaller size after lunch for another 8,000 contracts, this time for just $0.06.

As a result of all the activity, puts outnumbered calls in the fund by a bearish 6-to-1 ratio. Still it closed 1.3 percent higher at $159.53.

Bottom line: The bears came out swinging in QQQ yesterday morning, but they went home empty handed.

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Dr. Don Pratl is Director of Trader Development and Education for TradeStation. He joined TradeStation in 2016 after holding similar roles with other online brokerages. Don’s long career in the financial services industry reflects expertise in administering trading and investment strategy programs for retail investors as well as financial services professionals. Since the 1980s, he has held various positions in areas including CBOE trading floor order execution, marketing, sales, personnel management, training and customer service. Don holds series 3, 4, 7 and 63 FINRA licenses, earned his Ph.D. in Organization and Management, and his M.A. and B.A. in Political Science. He has been an occasional adjunct college instructor since 2004 at a range of institutions, teaching undergraduate, graduate and doctoral students using in-class and online formats.