Wednesday was the worst day for the overall market in 2024, with the SPDR S&P 500 Index (NYSE:SPY) was trading up over 2% and the Invesco QQQ Trust Series 1 (NYSE:QQQ) was trading up over 3.5% late in the session.
Many mega-cap tech names that powered much of last year’s rally sold off significantly on the day NVIDIA Corp (NASDAQ:NVDA), Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) and Tesla Inc (NASDAQ:TSLA) that fell more than 5% each.
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But even when the market is under pressure, there are ways to make money. Short-term option contracts are a risky way to play the market, but if they go well they can be a means to making big profits very quickly.
Put contracts on the QQQs on Tuesday with a strike price of $469, which expired Wednesday afternoon and closed at $0.05 per contract, according to Robinhood Markets (NASDAQ: KAP). At the time, the QQQs were trading at over $480 per share, making it highly unlikely that the index would trade below the strike price.
At their peak on Wednesday, those same contracts that had cost $5 on Tuesday were worth more than $510 each. This means that 100 contracts of those specific puts could have been bought for $500 on Tuesday and sold for over $50,000 on Wednesday, for a gain of over 9,900%.
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Put contracts give the buyer the right to sell the underlying shares (in this case, 100 shares of the QQQs) at the predetermined strike price, regardless of where the shares are traded, until expiration. With Wednesday’s bad red day well outside the standard deviation of the market as a whole, those put contracts exploded in price.
Normally the $SPY or $QQQs do not move more than 2% in a single day. But with earnings reports coming out Tuesday afternoon from two of the largest holdings in each index (Tesla and Google), there was an additional catalyst, setting the market up for a bigger-than-expected move.
Not to mention that the rapid increase in volatility on Wednesday also increased the value of the contracts. When the VIX (an indicator of market volatility) goes higher, the underlying value of options contracts also rises. This is because the increased volatility makes it more likely that a stock can reach the option contract’s strike price.
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This article You Could Have Turned $500 Into Over $50,000 in One Day When the Market Crashed: Here’s How originally appeared on Benzinga.com