The stock market was feeling optimistic ahead of the FOMC meeting on 1~2 Nov, especially a Wall Street Journal article published the week before suggested that the Fed could pivot.
I was in the camp that the Fed would not pivot and that the market would sell off after the meeting. So, I started a position of 5 contracts of Bear CALL Spread on QQQ (Nasdaq ETF) with a Sell CALL with a strike price of $260 and a Buy CALL of $263. That means if QQQ falls below $260 on the expiration date (4 Nov), I would get max gain. If the QQQ is above $263, it would be the max loss for me. I opened the contract when QQQ was trading at $267.
The intent of this trade was to bet on a huge selloff that would cause the premium to drop significantly, so I can buy back the spread to close at a profit. I do not need the share price to drop to below $260 to capture the max gain, as any significant drop in share price would result in a profit if I close the contract before expiration.
My maximum loss on expiration was $155, which I was willing to take, in exchange for a $1345 profit. Of course, I do not need to wait for the max loss to happen, if the stock market goes higher after the FOMC meeting, I can quickly cut the loss so the total loss for this losing trade will be less than $150.
The Fed did not pivot as I had anticipated and Jerome Powell’s (Fed Chairman) somewhat hawkish comments crashed the QQQ by more than 5%. I then closed the trade the following day on 3 Nov, when the QQQ fell a little more, to lock in a profit of $605. Using the max loss as the benchmark capital, the return over 2 days is 390%.
This is a low-probability but low-loss/ risk trade that can be considered if you anticipated that there will be huge price movement (whether up or down) after a major economic event. e.g. FOMC meeting, CPI reading release. If you are wrong on the trade, you will incur a minimal loss. If you are right, the reward will be good.
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This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
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