Index and ETF options are one of the weapons an options trader has in capturing broad exposure to certain situations whether it’s the broad S&P500 index or the financial sector. In this series, I’ll explain some of the more common index and ETF option contracts options traders have access to and wield rather frequently. As always, if there’s an index or ETF you’re not sure about and would want a better explanation, feel free to drop me an e-mail or a comment and I’ll be sure to add it to the running list.
Today’s index / ETF is the Powershares QQQ (Symbol: QQQQ), the most actively traded index / ETF in the world according to Powershares.
What is the QQQQ: The QQQQ attempts to track the performance of the 100 largest non-financial companies on the NASDAQ. Top holdings in the QQQQ include Apple, Microsoft, Google, Research in Motion, and eBay to name a few.
Why use the QQQQ: The QQQQ helps diversify a portfolio by covering a large number of companies without having to purchase contracts (or shares) for each individual company (as is common with most index / ETFs). Similar to the Forex (currency) market, the liquidity for the QQQQ is almost a non-issue with open interest around the 1 million mark. The QQQQ can be used as a hedge to the NASDAQ due to the large number of companies included in the ETF.
QQQQ Options Structure: The QQQQ trades just as any other equity trades on the options market. The QQQQ trades in $1 strike increments with options trading in penny increments. This offers great flexibility and inherently lower costs since the bid / ask spread is not as large as most options contracts. Most options contracts trade with a $0.05 to $0.10 bid /ask spread and as such can cut into profits.
If you want broad exposure to the large companies listed on the NASDAQ, the QQQQ may be for you. In the past year, the QQQQ has increased over 25% in price as compared to about 20% for the NASDAQ index so the tracking attempts by the ETF are almost on the mark.
