Earnings season is heating up, as Tesla and Google-parent Alphabet are set to report their latest results after the bell Tuesday. These two powerhouses account for 8% of the Nasdaq and are among its top 10 components by market cap. Their earnings reports are sure to trigger significant price movements in the tech sector. Below is a six-month daily chart of Invesco QQQ Trust, which closely mirrors the Nasdaq-100’s price movement and serves as a proxy for trading tech stocks. I’ve highlighted two potential support zones. Notice the mild bounce around the $475 area. I’m considering a bullish trade in QQQ for Wednesday — contingent on a positive market reaction to GOOG and TSLA earnings. The trade setup: A bull call spread Since earnings cause implied volatility to spike up, buying naked calls and puts is a losing proposition due to the inflated premium you have to pay for these options. However, if you buy and sell options at the same time, you can cancel out the negative effects of inflated IV. The trade structure I am suggesting is called a “bull call spread”. QQQ is a highly liquid ETF, and if you look at its option chain, you will notice that it offers $1 wide strikes. This allows you to construct a $1 wide bull call spread and risk as little as $50 to make $50 per winning trade. To increase risk, simply add more contracts. For example: Doing a 50 contract trade would risk $2,500 to make $2,500. All I need is for QQQ to go up by $1 by expiration date for this trade to double my money. Here is the exact trade setup: Buy $482 Call July 26 expiry Sell $483 Call July 26 expiry Limit Price: 50 cents This is a conditional directional bet based on the assumption of a positive reaction to GOOG and TSLA earnings tonight. I’ve suggested a 482-483 call spread because QQQ is trading at 482 as of writing this. If earnings are strong, QQQ will likely gap up and open at a higher price tomorrow. In that case, constructing a bull call spread around the current price level would achieve the same goal. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading using Options YouTube, Twitter: @TheMeanTrader DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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