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QQQ Option Trading

QQQ Option Trading

QQQ option trading is simply about using the exchange traded fund (ETF) commonly known as the QQQQ (or ‘the Cubes’) as the underlying financial instrument upon which you base your option trading strategies. The fund’s official name is the PowerShares QQQ Trust.

The QQQQ is the most active of all the exchange traded funds and is linked to the top 100 stocks in the NASDAQ Composite Index, known as the NASDAQ-100 (code NDX). It came into being in March 1999 and behaves just like a normal company stock, pays dividends and has options. The advantage however, of using an index related fund is that, unlike individual company stocks whose price action can be dramatically affected by earnings reports or news items such as a change in management, product releases, disasters etc, an index generally absorbs the impact of these things because the price movement for one individual share is never significant enough to affect the whole index. Only major economic news is likely to make a significant overnight difference to an index. Trading the QQQQ is a cheaper alternative to trading the NDX directly.

This being the case QQQ option trading is not only highly liquid which makes it easy to get trades filled, but also a safer alternative since its price movements are smoother and less likely to experience overnight gapping. This makes the QQQQ an ideal option trading vehicle. You can even take positions in it to hedge or balance your existing portfolio of options positions, particularly as expiry dates for short positions draw near.

The QQQQ is known to be a highly volatile ETF because the NASDAQ-100 includes a heavy weighting of tech stocks such as Microsoft, Apple, Intel, Oracle and Google. The second highest component is the health care industry which can also be highly volatile due to their sensitivity to news items such as FDA product approvals or otherwise. As such, it can provide good setups for option straddle trading. You simply wait till the price has run up or down to a support or resistance level and as long as implied volatility is not too high, analyze the risk graph and if you can see potential, place your long dated straddle or strangle trade, set your ‘good till cancelled’ exit levels and prepare to take profits when price action has moved in accordance with your strategy. For example when one side has enough profit to cover the cost of the other, you take profit and now have a ‘free trade’ on the other side. Or you may simply wish to wait for an overall position profit level.

If you have enough funds, another QQQ option trading strategy can be set up using a QQQQ straddle position with a near month expiry along with ‘gamma scalping’ techniques where you go long or short the actual QQQQ shares to keep it delta neutral until expiry date.

There are even services out there such as OneQTrades.com which are specifically set up to provide trade recommendations for only QQQQ related products. These include QQQ option trading signals. Some also advertise covered call services based on the QQQQ.

In summary, QQQ option trading can provide some exciting possibilities for the serious trader due to its liquidity and volatility. However, as any good option trader knows, it’s not wise to put all your eggs in one basket.