Despite the fact that we are in a recession, Nasdaq stocks are still trading at high valuations.
Meanwhile we are in the midst of a possible financial meltdown with some banks collapsing and others possibly on the verge.
That said, there is a trade that may look very attractive for the rest of this year to many traders.
In this video we discuss:
- What is in Store for IWM (the Russell) and Bank Stocks the Rest of This Year?
- How Are Technology Companies Going to Perform This Year?
- What is the Best Way to Trade IWM (Russell) and QQQ (Nasdaq)?
And we show you a real example on the Tastytrade option trading platform.
Hey guys, Darren here. Thanks for reading.
We talk about action steps you can take today to increase profits and reduce risks in your portfolios by trading options.
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DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
What is in Store for IWM (Russell 2000) and the Bank Stocks the Rest of This Year?
Financial Services sector is a large (15%) of the Russell 2000 IWM ETF.
Even before the Silicon Valley and Credit Suisse Bank collapses, all of the bank stocks had been hit due to the current economy and rising rates. However, this current turmoil in the banks will likely come to an end sometime this year.
Some banks truly are too big to fail and the government will do whatever is necessary to avoid a complete loss of faith in the banking systems world wide.
Unless we see lines at Wells Fargo and Bank of America running out the door with everybody pulling their money out, banks are on sale now and here is why!
IWM (Russell 2000 ETF) and the Banks Are On Sale
When we look at the 1 year chart for the IWM (Russell 2000) we see that it is at a low.
We also know that the banks, a major part of that IWM Index fund have been hit hard.
Now we can also go to Factset Earnings Insight and look at the Forward 12 Month PE Ratios and see the Financials in general are very low at an 11 PE.
So they are cheap and on sale!
Banks Do Well Coming Out of Recessions
We also know that banks tend to perform well when coming out of a recession. Earnings growth was expected to turn positive in the 3rd quarter of this year. It may likely be delayed now due to the recent events. But it will happen.
Looking at the Factset projected earnings growth for the Financials just prior to the recent collapses, we see that they were expected to be around 12-13% growth for the year.
Revenue growth was expected to be great as well at around 8%. The highest of all the sectors!
The S&P Earnings Growth was expected to turn positive in the second half of this year. However, it may be delayed a quarter or two now. We should still consider getting out in front of it now while the stock prices are still low.
How Are Technology Companies Going to Perform This Year?
The semiconductor stocks and technology companies are still pretty high or at least fairly valued. I think that the risk with QQQ (Nasdaq) is to the downside and not the upside.
The PE is still fairly high at 27. So if we think the QQQ’s have a chance of going down and the Russell (IWM) may go up soon, how do we trade the pair?
What is the Best Way to Trade IWM (Russell) and QQQ (Nasdaq)?
Let’s look at placing a couple of trades on the Tastytrade platform. It’s the best option trading platform. I’ll put a link below.
We punch in IWM in the upper left while on the trade page. We select the May 2023 option chain since it is closest to 45 DTE.
Select the bid to sell the 170 Put and ask to buy the 165 put and place a $5 Put vertical spread. We collect $161 for doing this.
Switch to the curve mode by selecting curve. We see the profit zone in green. As long as the price stays above the $170 short strike we keep the $161.
Now let’s look at a trade in the QQQ’s.
We open the same May option chain and select the bid on the $325 and ask on the $330 to sell a $5 wide Call Vertical in QQQ. We collect $179 about ⅓ the width of the strikes which is what we shoot for.
If we jump to the Curve mode and see that as long as we stay below the $325 short strike we keep the full $179. This trade has a 70% Probability of Profit.
So overall, we are collecting $161 plus $179 for the two trades so $330.
As you can see from this chart on TradingView the QQQ’s and IWM do track each other. However the current spread is a little out of the ordinary with the QQQ’s up and the Russell down due to the recent events in the banks.
This is a trade that I am placing now in hopes that over some time through the rest of this year the financial situation will improve.
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Thanks and see you in the next one!