Wednesday was the worst day for the overall market in 2024, with the SPDR S&P 500 Index (NYSE:SPY) trading down more than 2% and the Invesco QQQ Trust Series 1 (NYSE:QQQ) trading down more than 3.5% late in the session.
Many mega-cap tech names that have driven much of the last year's rally sold off significantly on the day, with NVIDIA Corp (NASDAQ:NVDA), Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) and Tesla Inc (NASDAQ:TSLA) each trading down more than 5%.
But, even when the market gets hammered, there are ways to make money. Short-dated options contracts are a risky way to play the market, but when they go right, they can be a vehicle to make large gains very quickly.
On Tuesday, put contracts on the QQQs with a strike price of $469 that expired Wednesday afternoon closed at $.05 a contract, according to Robinhood Markets (NASDAQ:HOOD). At the time, the QQQs were trading at more than $480 a share, making it very unlikely that the index would trade below the strike price.
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At their highs on Wednesday, those same contracts that would have cost $5 on Tuesday, were worth more than $510 a pop. This means that 100 contracts of those specific puts could have been purchased for $500 on Tuesday, and sold for more than $50,000 on Wednesday, good for a gain of more than 9,900%.
Put contracts give the buyer the right to sell the underlying equity (in this case 100 shares of the QQQs) at the predetermined strike price, regardless of where the stock is trading, up until the expiration date. With Wednesday's wicked red day, well outside the standard deviation move of the overall market, those put contracts exploded in price.
Typically, the $SPY or $QQQs don't move more than 2% in a single day. But, because Tuesday afternoon featured earnings reports from two of the biggest holdings in each index (Tesla and Google) there was an extra catalyst, making the market prime for a larger-than-expected move.
Not to mention the fact that the rapid rise of volatility on Wednesday also increased the value of the contracts. When the VIX (an indicator of market volatility) goes higher, so does the underlying value of options contracts. This is because the increased volatility makes it more likely that a stock could hit the strike price associated with the options contract.
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Image created using artificial intelligence via Midjourney.