Options Trading & Analysis

Trading Options in QQQ


It's a fair question -- does selling put spreads in the Nasdaq 100 (QQQ) work, and if so, how do we optimize the results?

ANSWER
We start with a simple test -- selling out of the money put spreads in PowerShares QQQ Trust, Series 1 (ETF)(NASDAQ:QQQ) over the last two-years using weekly options. Here are the results:



That approach returned 56.5% in two-years with a 74% win rate. But the next questions follow a deeper more intelligent narrative -- can we do better?

DOING BETTER
Next we will examine that same strategy, but we'll use monthly options rather than weekly. This will reduce our commissions and trading frequency.



We see a huge jump in the return from 56% to 83%. Even more, we see our win rate rise from 74% to 84.6%. But, we're not done. Trading is about precision, and our next gut check is to put in a stop loss.

DOING EVEN BETTER
We run the same test, using monthly options, but this time we put in a stop loss at 100% for the trade in PowerShares QQQ Trust, Series 1 (ETF)(NASDAQ:QQQ). Remember, selling a put spread can lose much more than 100% while it can only gain a maximum of 100%, so what we're doing here is evening our our profit and loss distribution curve.

Here's the setting we put in:


And here are the results:

The return jumps to 120% and we have actually reduced the risk of the trade by putting in a stop loss. This is trading, friends. Now it's your turn.


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About Ophir Gottlieb


Mr. Gottlieb writes financial news for CML and also as a contributor to Yahoo! Finance, CNN Money, MSN Money, and before then for Marketwatch, Business Insider, TheStreet and Real Money. He has become a staple in financial TV, often times seen on the Business News Network and CBC. Mr. Gottlieb's experience includes working as an option market maker on the NYSE ARCA exchange floor (CBOE remotely), as Managing Director of Client Services and Algorithmic Trading for Livevol, Inc, and as the Managing Director and Product Manager of Quantitative Research for GMI (now MSCI). Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model, both purchased by MSCI. FAM has been a celebrated achievement in artificial intelligence and quantitative finance that was introduced to world by the Rotman International Journal upon its completion. Mr Gottlieb's mathematics, measure theory and machine learning background stems from his graduate work at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron's, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Author's web site: http://bit.ly/TradeMachine


View Ophir Gottlieb's post archive >

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The Options Insider Radio Network

The Options News Rundown

Your source for the most important news and information from the world of options.

The Options News Rundown

The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

Options Insider Radio

The Option Block

This high-octane program features education, analysis, strategies and unusual activity.

The Option Block

Volatility Views

The premier radio program for volatility traders.

Volatility Views

The Long And Short Of Futures Options

Your source for futures options information.

The Long And Short Of Futures Options

The Advisor's Option

Arming advisors with the info necessary to manage risk.

The Advisor's Option

Options Boot Camp

Get into peak options trading shape.

Options Boot Camp

Options Insider Special Events

Compelling panel & special event recordings from the options world.

Options Insider Special Events

OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options Playbook Radio

Options Oddities

We track all the unusual options trading activity on Options Oddities.

Options Oddities

This Week in Futures Options

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

This Week in Futures Options

The Business Show

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.

The Business Show