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What are your options - the Q's - the Nasdaq ETF

Equities
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Delve into the world of "the Q's", a widely recognized moniker for the Invesco QQQ Trust ETF. Designed to echo the performance of the NASDAQ-100 index, it's a favorite among traders and investors. In our latest analysis, we highlight the QQQ's standing in the realm of options trading, where its volume rivals even the behemoths like SPY. We'll also break down various trading strategies, from bullish to bearish stances, complete with visual aids and comprehensive breakdowns.

What are your options - the Q's - the Nasdaq-100 ETF

Today we're having a look at the Q's. The Q's is a common nickname for the Invesco QQQ Trust ETF. It is designed to track the performance of the NASDAQ-100 index, which includes 100 of the largest non-financial companies listed on the NASDAQ stock exchange. Often, traders and investors simply refer to it as "QQQ" or "the Q's" (QQQ is it's ticker symbol).
The QQQ is one of many ETF's that track the Nasdaq-100. But when it comes to trading options, it's the second largest ETF when looking at options volume traded. Only the SPY (the most traded ETF in the world which tracks the S&P 500) is bigger in options volume than the Q's. And that's quite a feat for the Q's, considering that it has more options volume than the NDX and the SPX options (which are the options directly linked to the actual indices).

To put all these options volumes into perspective (numbers are rough estimates to give an impression):
 
  1. The SPY-etf can easily have 8 to 9 million traded contracts per day
  2. The QQQ-etf follows with an approximate daily volume upwards of 4 million per day
  3. The SPX-index options in the order of 3 million per day
  4. After the top 3 you'll usually find the big single stocks: Tesla, Apple and the last few days of course Nvidia, which can have volumes of around 2 million per day.
  5. The NDX-index options have a much lower volume (often less than 100,000 per day), due to their high notional value, which it makes it often not suitable for retail trader accounts.
The Nasdaq-index covers a lot of companies  (if not all) who are heavily reliant on loaned money, and thus the index is very susceptible to the outcome of major economic events. An example is the Jackson Hole Symposium which is taking place at the time of writing of this article.

So let's have a look at a couple of possible scenarios (bullish, neutral, bearish). For the occassion I've drawn them on a chart, so you have a better visualization.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
 

1. Bullish Strategy: Bullish Credit Put Spread

Here's what it looks like:

- Sell to Open QQQ 20-Oct-23 350 Put
- Buy to Open QQQ 20-Oct-23 345 Put

1. Strategy: A Bullish Credit Put Spread is a bullish strategy that involves selling a put option and buying another put option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.

2. Trade setup: In this case, the trader is selling to open a put option on QQQ with a strike price of $350 and buying to open a put option with a strike price of $345. Both options expire on October 20th, 2023.

3. Premium and risk: The trader is receiving a net premium of $1.25 per share (the difference between the mid prices of the two options), for a total credit of $125 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum loss is $375, which is the difference between the strike prices ($5) minus the net premium received ($1.25), multiplied by 100.

4. Breakeven point: The breakeven point at expiration is $348.75, which is the higher strike price minus the net premium received.

5. Probability of profit (POP): The estimated POP is 67.91%. This is a rough estimate of the chance that the trade will be profitable at expiration. Please note that this is a simplification and actual probability may vary based on factors like changes in implied volatility or the price of the underlying asset. The POP is based on the delta.

7. Days to expiration (DTE): There are 56 days left until the options expire.
 

2. Neutral outlook example: short iron condor (defined risk)

The second strategy we'll be looking at is the Iron Condor. An Iron Condor is an advanced options trading strategy that is designed to generate a consistent return with a high probability of success, when the expectation is that a stock or index will have lower volatility at/near expiration. The strategy involves four different contracts with the same expiration date but different strike prices.

Here's how it works:

1. Sell an out-of-the-money (OTM) put: This is a short Put at a strike price below the current price of the underlying asset. You receive a premium for selling this Put.

2. Buy an OTM put at an even lower strike price: This long put serves as protection in case the price of the underlying asset drops significantly. You pay a premium for buying this put, but less than what you received for selling the first put. The difference between the strike prices of these two puts forms the put spread.

3. Sell an OTM call: This is a short call at a strike price above the current price of the underlying asset. You receive a premium for selling this call.

4. Buy an OTM call at an even higher strike price: This long call serves as protection in case the price of the underlying asset rises significantly. You pay a premium for buying this call, but less than what you received for selling the first call. The difference between the strike prices of these two calls forms the call spread.

So, an Iron Condor consists of two vertical spreads: a put spread (for downside protection) and a call spread (for upside protection), both for the same underlying asset and with the same expiration date.

The maximum profit for an Iron Condor is the total premium received for selling the call and put spreads (minus commissions). This occurs if the price of the underlying asset is between the strike prices of the short call and short put at expiration.

The maximum risk or loss is the difference between the strike prices of either the calls or the puts (they should be the same) minus the net premium received.

Iron Condor trades are a good way to generate income in a non-volatile market, but they also require careful management due to the potential for significant losses if the price of the underlying asset moves too much in either direction.

Now let's have a look at an actual setup:
1. Trade setup: The setup involves four options on the NVDA-stock:
   - Buying an out-of-the-money 390 Call (expiring 20-Oct-2023)
   - Selling an out-of-the-money 385 Call (expiring 20-Oct-2023)
   - Selling an out-of-the-money 335 Put (expiring 20-Oct-2023)
   - Buying an out-of-the-money 330 Put (expiring 20-Oct-2023)

2. Premium and risk: The net premium received from establishing this trade is $178. The maximum risk, or the most you could lose on this trade, is $322. This maximum loss occurs if the price of QQQ at expiration is either above 386.78 or below 333.22.

4. Breakeven point: The breakeven points are 333.22 and 386.78. Any price of the QQQ at expiration between these two points will result in a profit from the trade.

5. Probability of profit (POP): The Probability of Profit (POP) is 57.66%. This is a rough estimate of the chance that the trade will be profitable at expiration. Please note that this is a simplification and actual probability may vary based on factors like changes in implied volatility or the price of the underlying asset. The POP is based on the delta.

6. Days to expiration (DTE): The options involved in this trade are set to expire in 56 days. This is the period within which the expected price stability should occur for the trade to be profitable.

7. Expected move: $25, based on a ATM straddle with expiration on 20 Octobre 2023.
 

3. Bearish Strategy: Bearish Credit Call Spread

This strategy involves selling a call option at a certain strike price and buying another call option at a higher strike price. Both options have the same expiration date. This strategy is used when the trader expects the underlying stock to fall moderately within a certain range (staying below the lower strike)

- Buy to Open QQQ 20-Oct-23 383 Call
- Sell to Open QQQ 20-Oct-23 378 Call

This is a Bearish Credit Call Spread on QQQ with an expiration date of Oct 20th, 2023. Here's a breakdown of the trade:

1. Strategy: A Bearish Credit Call Spread is a bearish strategy that involves buying a call option and selling another call option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate decline in the price of the underlying asset.

2. Trade setup: In this case, the trader is buying to open a call option on QQQ with a strike price of $383 and selling to open a call option with a strike price of $378. Both options expire on Octobre 20th, 2023.

3. Premium and risk: The trader is receiving a net premium of $1.59 per share (approx. the difference between the mid prices of the two options), for a credit of $159 (since each contract represents 100 shares). This is also the maximum profit of the trade. The maximum risk is $341, which is the difference between the strike prices ($5) minus the net premium received ($1.59), multiplied by 100.

4. Breakeven point: The breakeven point at expiration is $379.59, which is the lower strike price plus the net premium received.

5. Probability of profit (POP): The estimated POP is 67.81 %. This is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta.

6. Days to expiration (DTE): There are 56 days left until the options expire.
©barchart.com
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

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