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Tales of a Technician: Fool Me Once

September 8, 2020

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~Fool me once, shame on you. Fool me twice, shame on me!~

Traders awoke to another nasty down-gap this morning. The epicenter of the selling frenzy was once again the tech sector, with the Nasdaq opening down nearly 4%.

Fear was in the air, and the VIX quickly popped to 36, falling short of Friday’s high. To those who missed Friday’s intraday rebound, I believe this morning’s whack gave you a second chance to buy the blood.

Last week’s Options Theory blog laid out the Fade the Fear trade and I’m using today to reiterate the idea. While there’s a small chance that panic selling your positions this morning ends up looking smart, I highly doubt it. Adding this morning’s 4% thrashing to last week’s retreat brings the QQQ’s peak-to-trough correction to 10.6%. And NOW you want to panic? Why?

The bulk of the damage, if not all of it, has already transpired. I’ve learned through painful experience that it rarely pays to panic sell into these down-gaps. And we’re not even mentioning the fact that we were opening at major support zones like the 50-day moving average. The open also served as a re-test of Friday’s lows – which, by the way, are holding firm.

Just look at AAPL, TSLA, AMZN, ZM, or any other favorite tech stock. The lot of them were begging to be bought this morning, not sold. But you didn’t have to do so blindly. Price action told you buyers were emerging.

Here’s the intraday action in QQQ:

Now, I don’t know if the bounce is going to hold. No one does. All I’m saying is it rarely pays to panic sell everything on a down open like this.

For my part, I like strategically dipping my toes in the water with short puts and bull puts. The sky-high implied volatility is making the paydays handsome. For instance, the following bull puts offer over 10% ROI.

QQQ Oct $230/$225 bull put

AAPL Oct $90/$85 bull put

AMD Oct $62.50/$57.50 bull put

ZM Oct $250/$240 bull put

I could throw out a dozen more examples. We can quibble over the timing or whether or not today’s bounce sticks. You can hedge your bet by scaling in. Regardless, there’s no denying this is a tempting entry point for selling puts, particularly if you missed Friday’s low the first go around.

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One Reply to “Tales of a Technician: Fool Me Once”

  1. Avatar Fuad says:

    Thanks Tyler.
    It is an interesting market.
    Great premiums on the put side.

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