Playing a potential breakout in the Nasdaq

Last month the Nasdaq composite came within 1 point of 13-year highs before retreating with the rest of the market as concerns over the situation in Syria put pressure on equities. Speculation over the timing and pace of the Fed taper also weighed on markets into the end of August. The Nasdaq lagged the broader market through the first half of the year, weighed down by the weakness in AAPL and tech in general. With the Nasdaq coming so close to making new multi-year highs before selling off, many traders believe that this is the last gasp of this year’s bull market. E-mini Nasdaq 100 futures traded at a new 52-week high on Aug. 13 at 3148 before selling off to a one-month low of 3052.50. Since then NQ has been trading in a range as markets await decisions on military action in Syria, the Fed taper, and the employment situation to be released tomorrow. Trading near the top of this range in a period of contracting volatility, Nasdaq futures look primed for a breakout higher, especially as AAPL is beginning to show some signs of strength. Using options can help a trader that expects the unemployment number to come in strong set up a trade with a great risk vs. reward profile.

So if a trader expects the Nasdaq to breakout higher, what products can he trade to capitalize on this opportunity?

  1. A basket of Nasdaq listed equities. A trader could buy single equities to construct a portfolio that would track the Nasdaq. This is very capital intensive and would cost a trader a lot in commissions.
  2. Trade the ETF. There are several listed Nasdaq ETF’s that do a good job of tracking the index. There are also several double and triple bull and bear ETFs that a trader can use. While these products trade well, they don’t offer a trader the best opportunity to profit.
  3. E-mini Nasdaq 100 Futures (CME:NQZ13) and Options. The cleanest way to trade the index and the best way to set up a trade with great reward potential relative to risk.

Knowing that options on NQ futures gives us the best opportunity, we now need to calculate an upside target. With the September futures trading near 3130.00 and the September at-the-money straddle trading around 75 points, we can calculate an upside target of 3205 for September expiration. We can now use this target to set up a trade.

Trade:

Buying the NQ Sep 3190-3210 Call Spread for 4.75
Risk: $95 per 1 lot
Reward: $305 per 1 lot
Breakeven: 3194.75

This trade sets up with a 3.2 reward to risk ratio and a breakeven point well inside the measured move target for September.

Click to enlarge.

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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