by Wendy Kirkland
Back in my beginning option trading studies, I learned about three trading vehicles and have taught hundreds of traders about these three types of trading entities. They are stocks, indexes, and ETFs or Exchange Traded Funds.
Stocks are obvious; Apple Inc (AAPL), Microsoft (MSFT) or General Electric (GE) and thousands of others that fall into this category.
Indexes are usually funds based on something larger. An example would be the S&P Index (OEX) which is based on only 100 of the top S&P stocks or Volatility Index (VI) which is a summary Index of the S&P 500.
ETFs are a basket of stocks that often have a theme or connection. A medical ETF might incorporate stocks from cancer research, medical supplies and billing, hospitals, nursing and hospice care companies. Other ETFs might be sector or industry related.
The first ETFs I learned about my early years were the SPY, DIA, and QQQQs (since then the QQQQs lost one of its Qs so now it is just 3 QQQs). They are sometimes called Cubes or Qubes. These are ETFs that are a collection of stocks based on the major indices. The DIA or Diamonds is a collection of stocks from the Dow Jones Industrial Average (DOW). The SPY is patterned after the S&P and the QQQs is a composite of NASDAQ stocks.
I used to see the scrawl of QQQs run across the TV screen as I watched the tickers and think, Big Deal, the QQQs closed up .06 cents for the day. I wanted the meaty stocks like Apple with its $5 a day moves. So for 7 years, those were the stocks I bought options on.
Then one day I was back-testing the P3 System squeeze pattern on stocks and ETFs in different time frames, and I realized something…The QQQs have a combination of special elements that no other equity has. The elements set up circumstances that enable a trader to earn and withdraw daily profits from Quintessential QQQ option trades.
Of all the strategies and systems I have traded, this is the most consistent and reliable. Depending on the amount invested in the trade, making 10%, 25%, 30% or more a day happens consistently.
What Makes the QQQs so Special?
A main difference between indexes and an ETF is that indexes don’t actually own stock. Whereas, the QQQs ETF owns and is comprised of 100 different non-financial companies in the NASDAQ indice. The ETF is weighted by market cap. As an example, let’s say Apple (AAPL) currently contributes 12.3% to the ETFs value of 24.4 billion in assets (percentages periodically change). Other companies like Google (GOOG), Microsoft (MSFT), Oracle (ORCL), and Qualcom (QCOM) add various percentages as do the rest of the 100 companies.
Why does it matter which stocks make up the QQQs? Since Apple (AAPL) adds the larges percentage to the QQQ, often its activity is a leading indicator.
What else makes the QQQs so special? They are extremely liquid. Which means entries and exits are guaranteed because of the number of shares traded. On average, 66.1 million shares are traded a day.
In addition to the QQQs having the highest volume of all ETFs, it also has huge open interest in its options which makes for not just guaranteed but quick entry and exits. The circumstance that sometimes happens in more obscure options, where there isn’t enough buying interest to purchase your calls or puts will happen, or that it takes time for the market specialists to negotiate the buy back. With the QQQs, it happens in an instant.
When you trade the QQQs, you have automatic diversification, the QQQs are a lower risk trading vehicle. And when you look at the QQQs option chain, you will see that the spread between the bid and the ask is often a penny or two. Which means the amount the QQQs price needs to move before you see a profit is quite small.
The QQQs offer every type of option available – weeklys, monthlys and LEAPS. This flexibility means numerous strategies can be applied to this one equity.
Another aspect to the QQQs that I see as an advantage is you can become an expert on just one equity. You can learn its moves and it reactions to news, economic reports, and positive and negative earnings reports that affect its counterparts.
In every other respect, the QQQ are and act like every other single equity or security. You don’t need to learn any special chart indicators to interpret the QQQs. Any stock broker will gladly handle a trade on a QQQs position via the phone or online. Traders can easily learn how to place QQQ trades themselves with the click or two of their computer mouse. You can enter long or short positions, using weekly, monthly, or LEAP options.
The margin requirements are the same for the QQQs as they are for any other stock position or they can be traded through a cash account without margins or SEC day-trading restrictions. The QQQs settle like other options. In a margin account you have use of the funds from a closed position immediately. In a cash account, the funds from a closed trade clear and are available the next day.
One difference in the QQQs from other equities traded on the NYSE, S&P or NASDAQ, is the QQQs can be traded until 4:15PM ET, fifteen minutes longer than other equities. Also, the volatility on the QQQs is lower than on individual equities, which helps to eliminate over gap surprises. On the QQQ option chain, you will find strikes at every dollar (and periodically, especially on the weeklys, they are every .50 cents). You can trade in penny increments.
QQQs Advantage Recap
- Extreme Liquidity – Easy Entry and Exit
- High Volume
- Huge Open Interest
- Automatic Diversification
- Convenient Entries and Exits by all Brokers
- Lower Risk Equity
- Small Bid/Ask Spread
- Focus on and learn on trade equity
- All Option Types available – weeklys, monthlys and LEAPS
- Read QQQs charts like other equity’s chart
- Can short the QQQs
- Same margin requirements as a stock
- No minimum purchase requirements
- Settles in 1 day after closed trade in Cash Account
- Low Volatility
- Strike at every dollar (sometimes, every .50 cents)
- Trade in penny increments
- Trade day closes 15 minutes later than rest of the market