Potential Double Profit With Bearish Sentiment

Hey 5-Star Trader,

“Tuesday Trade” Journal: One of the most important concepts in trading is to review your work, and learn from the good and the bad. Identifying what is working is critical — to do more of it. So, to lead by example, each Tuesday, you’ll get a trade from my trading journal, in which I explain my thought process from start to finish. Trading is all about finding something that works, and applying it over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For this week’s example, I want to talk about trading the Nasdaq (QQQ).

As I’ve touched on before, the seasonality of May is typically very weak. In the last five years, the market has been flat to down the first week of May. This, in addition to the fact that I was trading the “FAANGover” after major Facebook, Amazon, Apple, Netflix, and Alphabet (formerly known as Google) (FAANG) reports led me to look for a bearish trade. 

Since I anticipated the whole market to experience some kind of pullback, instead of choosing a specific ticker I decided to put on a bearish fly on the QQQ. My charts were showing me a consolidating squeeze, volume going negative, and downside support targets (pictured below).

I entered with three contracts targeting $330 (BUY +3 BUTTERFLY QQQ 100 (Weeklys) 7 MAY 21 340/330/320 PUT @1.96 limit order (LMT).

Because this was a short-dated trade, I managed my risk by making this a small-sized trade.

In four days, the QQQ pulled back perfectly and hit my target. I was able to close out for a little more than double in the green (SELL -3 BUTTERFLY QQQ 100 (Weeklys) 7 MAY 21 340/330/320 PUT @4.21 LMT). Below is a screenshot of my options chain.

The notion “Sell in May and go away” certainly seems to ring true when it comes to market behavior, but this time we were able to use market sentiment in our favor!

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