Tuesday, February 26, 2008

Deconstructing the QQQQ

This is a continuation of yesterday's post on the XLF. Today we look at the Qs, my favorite trading vehicle, and some of the characteristics of that unique ETF. Below are the top ten components, which comprise almost 50% of the Qs asset base. As a daytrader of Qs options, I always maintain a separate live ticker watchlist of AAPL, RIMM, MSFT, INTC and EBAY. There are reasons why I don't look at the other components, but I'll discuss that reasoning in a later post. This unique thing about the Qs in this economic environment is that there is no exposure to the at risk financials and housing, and although stocks like PAYX clearly have financial links, their contribution to the Qs asset base is largely muted.

The current put/call ratio is higher than that of the XLF, suggesting the short term expectation for more downside. The open interest configuration displayed below indicates 1.4 puts for every call, a fairly substantial skew. The anomaly of 112,000 calls at 60 (current Ask = .01) is strange since the calls chain down to 53 are .01-.02. Maybe Adam can shed some light on this.

The interesting part comes with the short interest chart shown below. Since the Qs pay no dividend, a short position is free from that added liability. And since Qs options trade in $ 1 dollar strikes with typical .01 spreads (except when volatility steps up and then .02-.03 is not unusual), the ability to fade the Qs has few consequences relative to a long position. So why the decline in shorts relative to open put interest?

The last 3 charts were sourced through
http://www.schaeffersresearch.com/streetools/indicators/equity_oi_config.aspx , a free reference site that offers a multitude of indicators, tools and reference data.
I suspect the answer to the declining shorts question lies in the growth of the QID and the QLD, the X2 ProShares Ultra Short and X2 Ultra Long ETF spinoffs of the Qs. As can be seen from the charts below, QID volume has grown the past 17 months from nothing to a current daily average of 35M shares. Likewise with the QLD, other than the scale of it's growth has been more subdued. I suspect that the decline in Qs daily volume has been offset by the growth in QID and especially QLD volume as traders seek a better leverage. Spreads on the QID and QLD are typically .01 to .02 but when the market gets rolling, these things move like lightning and it's often trickey to get good limit order fills. I prefer to trade the Qs options, for a variety of reasons which I have noted many times on this blog. The Qs respond well to a variety of intraday technicals. . . they stick to the pivots like glue, and can be tracked reliably in 5, 8 or 10 minute bars with the MACD, RSI, CCI and the parabolic SAR..
They recently rolled out options on the QID and the QLD, although the QID option spreads are typicaly .15 -.30 and the spreads on the QLD options are .25-.50 (and are thinly traded) so I have absolutely no interest in them as a short term trader.

I'll add some additional statistical studies on the Qs, QID, QLD relationship in the coming days. Also see Saturday's weekly Qs update post for more background.


JZ said...

I learned a lot from the post. Also agree that option is a good vehicle. As a newbie of option, not sure what kind of option should choose; ATM, ITM or OTM? Near month? buy or call (long or short) option?

Hope you can share your thought?

bzbtrader said...

To answer your question with some level of intelligence would require all the hours that I dedicate to blogging for the next couple years. Choosing an underlying stock, index or ETF, selecting an option strike, either near or far, determining the timing for the purchase or sale of the option and whether the position is a spread or simple buy/sell. . .all those issues have to do with your particular strategy and risk tolerance. There are many, many great books available to educate you on these issues (such as Bittman's TRADING INDEX OPTIONS) and many fine blogs (such as https://adamsoptions.blogspot.com)(see his side panel on option terms and links to other option sites) to help you find your way and develop a trading plan. You do not need to invest $10,000 or $3000 for some hyped-up program or seminar that purports to teach how to trade options. Simply go to websites like ThinkorSwim or RedOption and read their educational sections, it's same info as in the seminars . . only free. Hope that helps and good luck in your quest.

JZ said...

Thanks a lot