- September 15, 2020
- Posted by: CoachMike
- Categories: Options Trading, Trading Article
In a recent blog article, we dove into the details of the S&P 500 ETF Symbol: SPY. It is one of our favourite markets to trade on a weekly basis as it is a very liquid product that shows consistent movement over time.
A second ETF that is at the top of our list of favourite markets is the Nasdaq ETF Symbol: QQQ.
We are going to take a closer look at QQQ today as the Nasdaq is such a big part of the overall market and has a big impact on daily movement
QQQ – Heavy With Technology
The Nasdaq has always been a key index that drives price action market wide, but it is especially true given how strong the technology sector has been the last few years. Stocks like Apple, Microsoft, Facebook, and Google have had incredible moves to the upside which has put the Nasdaq in a leadership position.
QQQ is one of the most active ETF’s on a daily basis which makes it a great product to trade options on. However, it’s important to know more about its components and how they impact the movement of the ETF.
QQQ is very heavily skewed towards the technology stocks which means it’s not the most diversified ETF. As you will see in a moment, the top 10 weighted stocks that make up QQQ represent 56.42% of the ETF.
While the Nadaq-100 tracks 100 stocks in the index, it’s really driven by the top 10 names that we will outlined below.
The ETF has really solid liquidity in the options making it a product that should be on everyone’s watch list. It offers both weekly and monthly options that have good volume and open interest which opens the door to use a variety of different options strategies.
Important QQQ Data You Should Know
Before trading any instrument, you should learn what makes it tick.
Invesco QQQ Trust (Symbol: QQQ) QQQ is an ETF (Exchange Traded Fund) that tracks the performance of 100 Nasdaq stocks.
While some traders like to trade options on the NDX which is the Nasdaq cash index, we prefer to trade QQQ as the ETF is much cheaper and easier to trade. The QQQ options are less expensive as well which makes it a better product for retail traders.
Performance: QQQ does provide a good snapshot for the technology stocks. The ETF is up .75% over the last month. It is up 10.80% over the last 3 months and up 28.59% year to date. It is up just over 44% over the last year and up just over 24% over the last 3 years.
The Nasdaq sector can be highly volatile making big moves back and forth on QQQ commonplace. It can be a great product for active traders looking for short term trades back and forth.
QQQ does track the performance of 100 individual Nasdaq stocks. While there are different areas of the market represented in the index, it is very tech heavy with almost 64% of the ETF coming from the tech sector.
While you have other sectors like Consumer Cyclicals, Healthcare, Consumer Non-Cyclicals, Industrials, Telecommunications, and Utilities represented they make up a much smaller percentage of the ETF.
While there are 100 being tracked the top 10 stocks drive most of the directional movement. As you can see from the screenshot below, it’s actually Apple, Amazon, and Microsoft that dominate the movement of QQQ on a daily basis.
While you might get into a trade on QQQ thinking it will provide really great diversification into the tech sector as a whole, 35% of the index is driven by just 3 stocks.
QQQ – Cheap Exposure
While you won’t get great diversification trading QQQ, it is a much cheaper way to get exposure to the tech sector when compared to taking individual positions on stocks like Apple, Microsoft, or Amazon. The options will be trading at much lower price points making QQQ an easier product to trade for retail traders.
QQQ can be a great substitute for the expensive stocks, but it is important to know that it’s movement will depend on what the top 10 stocks are doing on a daily basis. This is important to keep in mind especially when trading around big news events like an earnings release out of Apple. Even though it’s an ETF, QQQ can make large moves around these events from the individual tech stocks.
While QQQ won’t have the same level of liquidity that SPY has it is still one the most active markets in the world on a daily basis. Pull up any scan that looks for the stocks or ETF’s that have the most volume on a daily basis and you will typically find QQQ in one of the top 5 spots.
Looking at the 50-day moving average of the volume on QQQ it typically trades 44,517,014 shares on a daily basis. While we prefer to trade the options instead, the good volume in the shares of stock will also translate to good volume in the options as well.
The bigger the volume the easier it is to get in and out of trades quickly and at good prices.
The big volume will also mean tighter bid/ask spreads in the options which makes it much easier to use a wider variety of options strategies.
Best Options Strategies to Use For The “Q’s”
The best part about trading QQQ is the ability to use so many different types of options trades. We can use both weekly and monthly options as both have really great volume and option interest.
We can also use any type of options strategy as well including long calls and puts, debit spreads, and credit spreads.
Below you will see a screenshot showing our preferred options strategies depending on how aggressive our outlook is.
While I like to use both weekly and monthly options, our sweet spot is to look for between 20-40 days left to expiration on the options the we are trading.
QQQ Wrap Up
QQQ is another one of our favourite markets to trade on a weekly basis. It’s rare that we don’t have at least a few different QQQ options trades on at any one time.
While it’s a great product to trade, it’s important to pay attention to the big components that make up the index. With so many big tech stocks having such a big impact on the performance of the index products these days, we want to make sure we have exposure to other sectors of the market.
This way we get the diversification necessary to produce consistent returns over time.
I’m interested. What’s the cost?