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Market Neutral in High Gear: Our Phantom Trade Strategy Kicks in BIG! (IGV/TQQQ)

Posted on July 6, 2020

We have a very odd picture on the street today, with Main Street sentiment downright rotten (according to the weekly AAII numbers), retail traders on Robinhood wildly bullish (and buying everything with an abandon we rarely see), hedge funds and pros out and sitting in cash (by and large), and the CTAs all long.

So What to Make of It?

It’s a confusing picture, to say the least, and the market could swing strongly either way.  And it’s precisely for that reason we’ve been gearing our trades to profit in both directions.

We’re leaning on our new paired-straddle hedge again today, because it’s there we find the greatest potential for gains, coupled with protection against the prevailing uncertainty.

We’ve initiated several trades of this nature already over the last fortnight, and this week we’re headed toward the tech sector, because it’s there we expect the greatest volatility in the weeks up-a-coming.

But before we get to the details, a quick plug on our own behalf – something we rarely engage in, despite the exaggerated and jokey nature of the site.

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Now the all-important trade details.

Have a look at a six month chart of the two stocks at the center of today’s trade, the iShares Expanded Tech-Software Sector ETF (NYSE:IGV), and the ProShares UltraPro QQQ ETF (NYSE:TQQQ).

As you can see TQQQ keeps time with IGV in both directions, outdistancing the latter by a factor of two –

Our expectation is that the tech family (IGV) will break strongly in the next few weeks, and when it does, TQQQ will outdo it, putting one side of our straddle solidy in the black.

And it goes like this –

A Jew and His Money recommends you consider selling the IGV August 21st 290 straddle for $23.60 (CALL – $11.60; PUT – $12.00), and using those funds to buy the TQQQ August 21st 103 straddle for $23.20 (CALL – 11.65; PUT – 11.55).  Total credit on the trade is $0.40.

Rationale: TQQQ doubles the numbers put up by IGV, higher and lower.  By paying for the TQQQ straddle with an IGV straddle, we open the door for a strong potential take in two directions (should the market swing like the doors on a Rolls Royce Phantom).

The trade could lose marginally should the tech sector end up exactly where it is on expiration – an outcome highly unlikely, however, considering our intention to close out at the first sight of a run.

With kind regards,

Hugh L. O’Haynew

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