Options Theory: 3 Ways to Play the Growth Stock Carnage
January 13, 2022
We’re witnessing a market of great disparity. On the one hand, you have sectors like energy, financials, basking near 52-highs. On the other hand, growth stocks are getting destroyed. Did you know that 4 out of every 10 stocks in the Nasdaq have fallen 50% or more from their one-year highs?
Check out this humdinger of a chart from @sentimentrader
Of course, because the Nasdaq Composite Index is market-cap weighted you don’t really see the bloodbath. Even after Thursday’s whack, QQQ is still only 7.6% off the high. But, again, underneath the surface, it’s a completely different story. I’ve been using (and will continue to use) the Ark Innovation ETF (ARKK) as my go-to proxy for high beta growth stocks. It just fell to a new one-year low and looks disgusting.
So what’s a smart, tactical trader to do with this information? I can think of a few things.
First, if you’re a believer in trend continuation (which you better be if you use technical analysis!) then, for heaven’s sake, steer clear of deploying bullish trades in the growth space. It’s a horror show and could get worse before it gets better. Instead, focus your attention on the areas that are leading, like XLE, XLF, XLP, and the like.
Second, heed the mantra, “if you can’t beat ’em, join ’em.” Look for bearish trades in growth stocks. Here are three examples.
Mega-caps will Succumb
QQQ formed a lower pivot high with yesterday’s decline and continues to flash warning signs. If you think the big boys will prove unable to reach a new high for the next month then consider bear call spreads. Consider this the highest probability idea of today.
Sell the Feb $405/$410 call vertical for 55 cents.
The Sinking Arkk
I’ve pitched bear trades on ARKK in the past during my Wednesday Trade Masters competition on YouTube. And while it’s tempting to say ARKK can’t go any lower because it’s already down 50% from its highs, the reality is this sucker could fall way more. If you want to bet on more growth stock pain without picking an individual company, then bear spreads on ARKK make sense.
To offer some variety, let’s go with a lower probability spread with a higher payout potential.
Buy the March $80/$69.22 put vertical for $4.
Pick a Puker
The final option for profiting is to pick one of the dozens of struggling growth stocks. Since they were the biggest losers on Thursday, how about simply sorting your watchlist by percentage change and viewing the charts of those that top the list?
The correlation between them is so high, I’m not even sure it matters all that much which one you pick. As long as growth is out of favor, you should be fine. That said, here’s an example on Rivian (RIVN).
Buy the March $80/$65 put vertical for $6.40.
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