The QQQQ Diagonal

Even though plenty of people out there believe that the market should trace back based on fundamentals as well as technicals, the bulls keep beating the bears. The last week's close broke previous highs and even some very important fibonacci levels. I thought that Monday's blues would kick this market back, but we are up again today. I still feel the market will trace back but now, theoretically speaking, the support is at 1015 for S&P. The main change in my trading thought after this move is that where I did not want to go long at anything above 1000 S&P levels, I believe when the market kicks back, it will fall to this 1000-ish level and then rebound.

Based on this hypothesis, I have entered into a long-term options trade for the QQQQ's.



As I mentioned, the Nasdaq broke previous highs and the 50% fibonacci level which was at 39.65. I particularly like this chart because as you can see, the QQQQ has stopped at nearly every fibonacci level on the way down and up. Thus, I feel this pattern should continue. Based on that, I see the stock moving up 43.50 area or retracing to the 39.50 area. Once again, I am more bullish and am expecting the former rather than the latter.

The Trade
Buy 5 March '10 calls at strike 35 for 6.77
Sell 5 Sep '10 calls at strike 43 for .14.
Total outlay is 3315. My margin req. is 0 which I like because it means I have capital for other trades.

Strategy
My max risk is 3315 which is possible if the QQQQ crash well below 35 level (to somewhere like $10). Highly unlikely so this is a moot point.
I have already captured 2% of the trade with the sale of the call. Not the best payoff, but I know that if the QQQQ doesn't even move, I have made 2% by Sept expiry.
My highest payoff will be at $43. This way I get to keep all my premium and my capital appreciation on the long call is the maximum it can be. At this level, I expect to make a profit of approximately $1000.
Another important part of this trade is that once Sept expiry comes along, I will analyze this trade again and will probably sell more calls based on the QQQQ price level. Thus, I will be creating a monthly income by selling calls until around Jan-Feb (around the time when the time decay starts hurting me). Thus, I can capture 2-5% of my long calls every month.
Overall my strategy is mildly bullish and as long as the QQQQ appreciates in price to somewhere between 42.50-44, this could be a highly profitable trade.