A bearish options trade that wins if Nvidia and the QQQs continue to cool off

Published Tue, Jun 25 202410:29 AM EDTUpdated Tue, Jun 25 202410:36 AM EDT

Nishant Pant @TheMeanTrader @TheMeanTrader

Nvidia (NVDA) is finally showing signs of profit-taking, suggesting that the entire technology sector might be ready for a breather. This could present many bearish trading setups in various stocks because of the influence Nvidia has had leading the AI bubble. For now, let's focus on making a bearish trade in the Invesco QQQ Trust , an ETF that tracks the Nasdaq 100 index. After hitting an all-time high, QQQ is getting rejected at $486. In the 6-month daily chart below, I have used Fibonacci retracements to project some downside price targets. These retracements provide valuable insights, projecting current price dynamics into the future, helping me anticipate potential market movements with more clarity. Fibonacci analysis shows that QQQ could drop all the way down to $459 before it sees some relief. This level represents a 5.5% pullback and coincides with 61.8% retracement level which is widely considered an area of support for stocks in an uptrend. The Trade The trade structure I have chosen here is called a Bear Call Spread also known as a Call Credit Spread. To construct my trade, I will want to sell a $483 call option and buy a $488 call option as a single unit. As long as QQQ stays below $483 in the next 17 days, this trade will return a 38% ROI on the money risked. When selling credit spreads, you bring in a premium when you open the trade. If the trade goes in your direction, you get to keep that premium. This trade brings in a $140 premium with a 66% chance of success (as calculated by options probabilities) Here is my exact trade setup: Sold $483 call, July 12th expiry Bought $488 call, July 12th expiry Credit: $140 Credit spreads are high probability trades. This means that you can expect every 7 out of 10 trades to become winners. But it comes with a catch. The winners will bring in small profits which will add up over time. But the losers will bring in larger losses. In theory, the three losers will cancel out seven winners. One will need to have a risk management plan in place, so that the losers are cut at predefined levels before they become too big. By having an effective risk management plan, these trades can be very rewarding over time. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.