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?
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?
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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