Alert

The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.

tastytrade
People all dressed up as Santa Claus in Time Square

Nasdaq Pullback: Where’s the Santa Claus Rally?

Dec 20, 2021

By:James Blakeway

Whether you want to blame it on the spread of the Omicron variant and impending global lockdowns or the upcoming slowdown of the Federal Reserve’s asset purchase program, the broad stock indices are taking a turn. Gone are the days of back-to-back, nonstop rallies in the S&P 500, Nasdaq-100 and Russell 2000, for now at least. The S&P and Nasdaq hit all-time highs on November 22nd, while the Russell found its high on the 8th of November. Since then, all three are in rougher shape with the Russell down almost 12% off of the high.

Graph of SPY, QQQ, IWM from Jan 2021 to Nov 2021

Chart of SPY QQQ IWM comparing IV and IVR

All three index exchange traded funds (ETFs) exhibit high implied volatility rank (IVR) as a direct result of the selling and uncertainty of future movement. Both the Russell 2000 ETF (IWM) and Nasdaq-100 ETF (QQQ) show IVRs in the 60s, compared to the S&P 500 (SPY) with an IVR of 55.

Regardless of directional bias, traders mitigate a portion of risk when trading options on ETFs instead of individual stocks. By providing exposure to a large basket of stocks, the index ETFs reduce susceptibility to large earnings moves, other corporate actions and news driven moves that impact the individual companies.

Top 10 Stocks in IWM & QQQ

Traders looking for the most diverse basket of stocks would likely favor the Russell 2000 and IWM, with the clue being in the name. The ETF holds a basket of 2000 small-cap stocks with no single stock comprising more than 0.5% of the portfolio. In total, the top 10 holdings in IWM make up only 3.3% of the entire portfolio.

Chart of IWM Top Holdings

Now contrast this with the Nasdaq and QQQ, where the top 10 stocks make up a staggering 52% of the total holdings.

Chart of QQQ Top Holdings

Additionally, the sector exposure of the QQQ is extremely tech heavy, at around 49% with an additional 18% in communication services. For IWM, healthcare is the largest sector at 17% with industrials and financials tied for second place at 15% each.

Traders should be mindful that the top tech stocks in the Nasdaq are also the top components of the S&P 500 and both long term portfolios and shorter-term trading accounts can become overly exposed to those stocks very quickly.

Trade Ideas in QQQ ETF

Traders looking to take advantage of some heightened options prices may be interested in trades for QQQ in the February expiration. The Alpha Boost email from Quiet Foundation highlighted some potential trades this morning.

This Jade Lizard idea combines selling a 280 put and a 408/410 call spread for a position with no upside risk at expiration.

Chart of QQQ at $380.29 and IVR at 64%

This trade is slightly net bullish in its delta but will make money as long as QQQ stays above $280, $100 below current prices. The overall credit being above $2 creates no risk even if QQQ rallies above $408.

This short call spread idea may be for traders who believe the selloff has room to run for the Nasdaq. Combining the short 400 call and long 405 call this call spread collects 1/3 the width of the strikes and has an upside breakeven of 401.70.

Chart of QQQ at $380.29 and IVR at 64%, bearish vs. short call

Sign up for the Alpha Boost newsletter for more trade ideas sent directly to your inbox and check out the Follow Feed on tastyworks for the latest strategies from tastytrade co-hosts.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). 

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.