QQQ traders...

[northcascades]

(Reviving this thread)

I've been paper trading a strictly QQQ strategy for several months, buying front month options and hedging with the underlying using a directional bent, "comfortably" returning 5-6% per month. I basically copied the strategy from Todd Harrison's diary and after studying and tweaking it during the past couple years I've decided it is a great fit with my psychology so I'm keeping track to see if I can make it work.

I like this instrument for several important reasons:
1. QQQ is at present the most liquid equity vehicle.
2. The near strike options almost always trade with a nickel spread. Moreover, volume is so high that pricing is very "efficient." This is bad for abitragers (blame them for the liquidity?) but good for directional traders who aren't concentrating on exploiting inefficiencies.
3. I would argue that macro data is translated as well to the QQQs as it is to the S&P but the higher beta of the QQQs leverages this instrument better to economic news.
4. The competativeness with which the QQQs are traded (evidenced by the high volume) makes them a great proxy for market psychology.

In practice, my strategy, which is purely discretionary (vs. system oriented) makes 4-8 trades per day so transaction fees are not too high relative to principle and there slippage is immaterial.

Thought I would add two cents for a good way to trade this vehicle.

 

[NUTSNEAL]

northcascades

You say you are using a stratgey buying front month options and hedging with the underlying. Could you be more specific about the mechanics of your strategy? I trade the QQQ and their options quite a bit. It seems to me the index generally moves several ticks before a change in the bid and offer of the options (even the at or near the money in the front month), and even then I often notice the first move or two in the option is a widening of the spread in the direction of the move (raising ask while holding bid for an up tick in the index). At times this spread reaches .15 or .20 instead of the more normal .05 to .10 spread. For this reason, I have found it harder and harder to squeeze profits from the QQQ options intraday. I find trading the index as opposed to the options requires considerably smaller moves for me and at the same time increases my profitable trades ratio.

Please elaborate more on your strategy because I think a lot of use are trading this market right now. Please be as detailed as possible including any keying or trigger indicators you are using.

Thanks

 

[northcascades]

nutseal, the scenario you describe where the spread widens in the direction of the underlying move is typical for an option. Still, the QQQ options trade with a nickel spread most of the time.

Since my strategy doesn't "trade" the options, I'm only concerned with getting a few good fills per month. This strategy takes a position in the option and trades the QQQ around the option delta to hedge.

For example if I buy 100 QQQ Jun 30 calls that have a delta of 0.65, the proper hedge would be to short 6500 QQQs. But I may only short 4000 shares at that time because I think I can sell more at a higher price. If I short 4000 shares, my position delta is long 2500 QQQ. If the market does rise, my position delta rises as a function of gamma. Suppose the QQQ moves up $1 the same day. Here my call delta would increase by 65 cents ($6500) while my short position would lose $4000 making my net paper profit $2500. At the same time the delta of the calls might now be 0.80 meaning I'm delta long 4000 shares. Now I would have to sell 4000 additional shares to hedge - at a higher price.

By expiration I'm profitable if my profits trading the underlying have been greater than the drop in value of the options, or if the increase in value of the options has more than offset my losses trading the underlying.

As for my specific methodogy, it is difficult to quantify. It is based a lot on my interpretation of fundamenta data, market psychology, and some technical analysis - combined with a "feel" for the market and good discipline.

Hope this helps.

 

[Babak]

northcascades,

maybe I'm missing something but of what value is trading around an option position when you could simply be trading? (especially when you are holding a wasting asset: call option with time value)

In either case your result is determined by the difference in what you paid and what you received. But in the former it is amalgam of your option positon and your discretionary trading and in the latter it is simply your discretionary trading.

Have you gone back and calculated how much you would make if you removed the option side of the paper profits/losses?

 

[northcascades]

Originally posted by Babak
northcascades,

maybe I'm missing something but of what value is trading around an option position when you could simply be trading? (especially when you are holding a wasting asset: call option with time value)


It's a matter of style. Trading around an option is a more fluid, curvy process - you're sculpting market exposure. It allows you to be passive, since your position delta will increase or decrease relative to the underlying without having to initiate a trade. I also think the strategy encourages a proactive rather than reactive attitude. It compells you to sell into strength and buy into weakness. Strict daytrading is largely a reactive process.

Really the strategy is a comprimise between a long straddle and pure stock trading. With a straddle, the "wasting asset" aspect of options is difficult to overcome, and pure options positions are more difficult and less cost effective to manicure than a combined stock/option position.

BTW It is also possible to hedge the options with an NDX e-mini contract. One e-mini contract translates to 800 QQQs. For example a position of 64 QQQ puts with delta of 0.5 can be hedged by buying 4 NDX e-minis or 3200 QQQs.

 

[Babak]

I respectfully disagree. You may think you being proactive but you are still reacting to changes in your exposure. But it seems to work for you so I'll leave it alone.

Again, I will repeat my question: Have you gone back and looked at your trading (without the option side)?

 

[Don Bright]

I assume you're in Washington State by the user name...I had a home on Lake Tapps, in Sumner for a number of years.

I just wanted to make a couple of comments about the strategies you are outlining...please accept my comments as coming from a long time options floor trader, and somewhat biased from the success enjoyed trading options.

It breaks my heart to almost hear those "thetas" (or time decay) being torn away from your long positons....I so enjoy long weekends, knowing that my "near term" and "short" options are flowing cash into my trading account......options are meant to be sold by traders and bought by those seeking "insurance" against a portfolio that may be rising in value (or at least paying dividends).

This kind of reminds me of those (people) who are attempting to sell those ridiculous "spread" strategies on late night TV (obviously nothing more than very expensive straddles and stangles)....and the success rate is miniscule in both attempts.

I really appreciate the almost poetic way you look at trading, and just think that you might want to take the same approach to selling near term and buying the far outs or mid terms...and rolling them over near expiration. I think you'll find that strategy more lucrative in the long run.

As always, I may have missed something here...and am not trying to be judgemental at all....just offering up my thoughts.

Best of luck!!

Don

 

[northcascades]

Originally posted by Don Bright
I assume you're in Washington State by the user name...I had a home on Lake Tapps, in Sumner for a number of years....

It breaks my heart to almost hear those "thetas" (or time decay) being torn away from your long positons....I so enjoy long weekends, knowing that my "near term" and "short" options are flowing cash into my trading account......
---

Thanks for your imput, Don. My mother-in-law lives in Bonney Lake; the area with Mount Rainier as the backdrop is very scenic but there is a lot of subdevelopment going on now.

Anyway, with the current geopolitical situation as it is, I have an easier time picturing option sellers spending the weekend biting their nails over the prospect of a high "vega" event greeting them Monday morning with a year worth of losses. On second though I've heard that institutional sellers like to be long some vega to help protect their nearby shorts.

I don't think it's a realistic possibilty for an average "prop" trader to be a sucessful options seller without a floor membership, firm backing and risk management support, and low transaction fees that institional sellers enjoy.

 

[Yannis]

Originally posted by AllenZ
Don,

I am trading exclusively the qqq and find that there are several setups that occur daily. The problem lately ( last 4-6 months ) is the the ranges have narrowed intraday and the qqq tends to move no more than .30-.50 before stalling or retracing. I have been successful in pulling some scalp profits out of the qqq with my technical analysis setups ( double tops/bottoms, reversals, breakouts, slimjim patterns ) but the big moves are tougher to attain. Currently I use about a .15-.20 stop loss and look for moves of .30-.50 and find I can make consistent money this way.

Allen Zuckerman

Allen,

Have you considered using yout technical setups on 30 min charts to trade current month QQQ options? These trades can be stopped relatively easily for a 10%-20% loss, but then again, as expiration Friday approaches, if timed properly, they can also deliver 100%-1000% profits, partially because the price of the options drops a lot and the price gyrations grow considerably (like a loaded spring.) Of course, only use small amounts of risk capital here - the payoff is the occasional x10 winfall.

 

[lundy]

Don, is my understanding correct that you primarily arbitrage profits without taking any directional bet? If so, then there are probably very limited ways to profit on the QQQ and it would seem that the arbitrage profits can only get smaller as more compete for them.


North Cascades, I have sold options using IB's TWS with an option account. It didn't seem that hard, took only about half a second, and it cost the same as buying an option. Thank you for sharing your strategy, I really like the idea of taking a partially hedged bet on the QQQ using all that fancy vega and delta stuff. I'd like to learn more about it, and your posts certainly got my eyes wide open.