Many traders who are new to trading options prefer to keep it simple, usually sticking to straight buying of puts or calls to match their market outlook. But moving from outright options buying and selling to spread trading is not as difficult as it may seem. Here we look at a trade that can be used for trading a bullish outlook with a limited risk options credit spreadwhich can be substituted for buying options. The position contains a significant statistical edge, as well as an overall lower risk profile. Trading the QQQQ To illustrate the above strategy, we will use the QQQQ formerly the QQQ as an example. The "Qs", as they are commonly known, represent the ticker symbol for the Nasdaq Trust, an ETF exchange-traded fund that tracks the Nasdaq index. Traders can buy and sell the Qs if they want to trade the underlying Nasdaq Index, much like futures traders trade futures contracts on the same index. Option traders, meanwhile, can trade the options on the QQQQ, and these options have exploded in volume since they were introduced. For further reading on ETFs, see Introduction To Exchange-Traded Funds. Let's say you believe that you have a medium-term bullish outlook on the market and would like to speculate on this view using options. One approach might be to simply buy two long-dated at-the-money options on the QQQQ, which would qqq a position delta of about or 1. Suppose you decide you would like to buy two January at-the-money options to go long on the QQQQ. This strategies give you unlimited upside profit potential with limited risk on the downside. The QQQQ at the time of writing was trading at Of course, one of the downsides to buying options is risk from time-value decay. Meanwhile, if the move never occurs, and the QQQQ heads lower, the loss of the entire premium paid for the options is trading. To learn more about time value, see The Importance Of Time Value. Finding a Better Trading Solution In order to speculate on a bullish move higher, it would be nice to minimize the theta risk mentioned above. Fortunately, there is a way to do this without sacrificing your probability of profit from a statistical point of view. There is only one small, insignificant cost, which comes in the form trading a few extra dollars in commissions because you are going to use a spread, which has an extra leg. Assuming again that the QQQQ is at Here you would pick a deep in-the-money put to sell and an at-the-money put to buy. You are selling two spreads to make the position roughly equivalent to the long calls position shown above. As presented in Figure 3, there is only 1. This is the potential maximum loss if the market heads straight down, or remains below the 39 by expiration. Now as you can see in Figures 1 and 2, both positions are nearly equivalent in terms of position deltas with the long calls gaining an edge if the QQQQ moves significantly higherbut the theta risk is significantly different. For further reading, see Using The Greeks To Understand Options. Finally, while not shown here, the probability of profit and expected profit are substantially different from a purely statistical point of view. While, trading, these trades don't look good overall, if your market outlook is correct and a good move higher occurs, you would strategies better off with the alternative approach based on this probability perspective. With a really big move higher, the long calls would acquire more potential profit at expiration. The Bottom Line Given the evidence, it seems that selling an in-the-money put spread on the QQQQ, which could be applied to many individual stocks, has certain key advantages over buying at-the-money calls. Perhaps most importantly, the cost of being wrong is also higher, for the long calls. So if you are new to trading options, keeping it simple may mean short changing yourself. Consider moving to options spread trades, such as an in-the-money put spread - understanding them may be easier than you strategies. If you're looking for an introduction to the world of options, see our Options Basics Tutorial. Dictionary Term Of The Day. Net Margin is the ratio of net profits to revenues for a company or business segment Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Trading The QQQQ With In-The-Money Put Spreads By John Summa Share. Figure 1 - January at-the-money QQQQ 39 long qqq. January QQQQ Puts Option Position Option Prices Time Value Net Credit Jan 46 put Sell 2 6. This options spread strategy provides many advantages over plain old puts and calls. This trading strategy is an excellent limited-risk strategy that can be used with equity as well as strategies and futures options. There are ways to control risks, reduce losses and increase the likelihood of success in your portfolio. Find out how spreads can help. Learn why option spreads offer trading opportunities with limited risk and greater versatility. Writing bull put credit spreads trading not only limited in risk, but can profit from a wider range of market directions. A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads Learn how using an out-of-the-money time put spread can be used to hedge downside risk by reducing the amount of premium Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads Learn about qqq option Greek theta and credit spreads, why credit spreads have positive thetas and what positive thetas signify Learn how a short call is used in a bear call spread option strategy, and see how a bear call spread benefits from the time Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage A measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time An investment that is not one of the three traditional asset types stocks, bonds and cash. The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories Brexit refers to Britain's leaving the European Union, which could happen in as few as two years. No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Qqq Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.
Relative Strength Index ETF Trading Strategies Follow The Trend IWM SPY QQQ DIA 5/18/2013
Relative Strength Index ETF Trading Strategies Follow The Trend IWM SPY QQQ DIA 5/18/2013
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