RTS, I see a lot of anti-venom in those charts ... (fwiw) I was a big seller of silver stocks on Friday-- but if I don't pull myself away from the computer I'll be back in (prematurely?) ... plenty of strength within the PM sector.
Anyway, you post a lot of useful information-- so I thought I'd better say hi and let you know that I've been lurking.
The Nasdaq 100 Index ($NDX) is one of the more popular indexes today. It represents the performance of 100 of the largest non-financial stocks that trade on the Nasdaq Stock Market. Therefore, large cap technology companies like Intel (INTC), Microsoft (MSFT), and Cisco Systems (CSCO) dominate the index. For that reason, the index is often used as a barometer for the performance of the technology sector. In addition, the Nasdaq 100 is one of the more popular trading vehicles among options traders. In fact, there are three different ways options traders can trade the Nasdaq 100 and each has various advantages and disadvantages over the others.
The Nasdaq 100 Index is a market value or capitalization-weighted index that includes one hundred companies. Market value-weighted indexes are constructed so that larger companies (which is computed as common shares outstanding times market price) exert a greater influence on the performance of the overall index than do smaller one. The table below shows the top ten Nasdaq 100 stocks and their respective weightings. Notice that these ten stocks alone account for more than 40% of the total index. In short, the larger the company, the greater its sway within the index.
Company Name Symbol % of Index
Microsoft Corporation MSFT 10.18
Intel Corporation INTC 5.17
Cisco Systems, Inc. CSCO 4.56
Amgen Inc. AMGN 4.18
QUALCOMM Incorporated QCOM 3.62
Dell Computer Corporation DELL 3.18
Comcast Corporation CMCSA 3.05
Oracle Corporation ORCL 2.84
eBay Inc. EBAY 2.66
InterActiveCorp IACI 2.59
Since many large cap tech and biotech companies dominate the Nasdaq 100, the index has attracted a wide following among market watchers and traders. For one, the index is considered a barometer for the performance of the big techs. In addition, it is sometimes volatile and can provide interesting trading opportunities for those strategists that can predict the Nasdaq 100’s next movement.
There are actually three separate trading vehicles for playing the Nasdaq 100. First, there are options linked directly to the Nasdaq 100 Index. Trading under the symbol NDX on the Chicago Board Options Exchange [CBOE], these are cash-based options that are similar to options on the S&P 500 Index ($SPX) or the S&P 100 Index ($OEX). Specifically, these options settle for cash. In other words, exercise and assignment involves the transfer of cash (equal to the difference between the strike price and the index price), and not the delivery of shares like with stock options. In addition, NDX options settle European-style and therefore exercise or assignment can only take place at expiration. This is in contrast to stock options, which have the American-style settlement feature that allow options holders to exercise the options at any time prior to expiration.
While the Nasdaq 100 options have been available for many years, they have not garnered a lot of interest among options traders due to their wide spreads and lack of liquidity. For instance, as of this writing, the front month at-the-money puts (NDX August 1250 puts with the index trading near 1,250.00) are currently quoted at $22.50 bid and $26.20 offer. So, buying one options contract would cost $2,620.00 (because the multiplier is equal to 100) and could be sold for only $2,250.00. Therefore, just purchasing one put contract would immediately put the trader $370.00 in the hole ($2,620 - $2,520).
The mini-Nasdaq 100 Index ($MNX) solves some of the liquidity issues inherent in the Nasdaq 100. The index is identical to the Nasdaq 100 in all aspects except one. Namely, MNX is equal to 1/10th of the NDX. Therefore, when the Nasdaq 100 recently fell to 1.250.00. The mini-Nasdaq dropped to 125.00. Furthermore, since the value of the MNX is much lower, so are the option premiums. For instance, the MNX August at-the-money puts were recently quoted at $2.30 to $2.60, compared to $22.50 to $26.20 for the NDX.
Instead of playing the cash-based NDX or MNX, some traders prefer to use the Nasdaq 100 QQQ (QQQ). Sometimes called the Qs, the Nasdaq 100 QQQ is actually an exchange-traded fund with shares listed for trading on the American Stock Exchange. Investors buy and sell QQQ like stocks. However, rather than representing ownership interest in just one company, QQQ represents ownership in a basket of stocks. The basket of stocks is made up of the Nasdaq 100. In fact, the QQQ is designed to equal 1/40th of the Nasdaq 100 and will behave very similarly to the NDX and MNX.
While the day-to-day price movements of the Qs are similar to the cash-based indexes, there are some important differences in the way the options settle. First, the QQQ settles for shares rather than cash. In addition, unlike the MNX and NDX that exercise European-style, the QQQ settles American-style, which means that exercise and assignment can take place at any time prior to expiration.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum
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