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Great Sites:
Index-Day-Trading
QQQQ-Market-Timing
Trading-Glossary
TradersFloor
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Our QQQQ Options Trades
in June 2004:
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June 7, 2004.
- On June 6, 2004, a "put" signal was generated.
- On June 7, 2004, a trade
was initiated in accordance with the signal issued the
day before. We bought QQQQ puts at $1.40 per contract.
- On July 1, 2004, the
trade was closed in accordance with our signal. We had
decided to lower our "Suggested Exit Price" and close out the trade.
Since the expiration date for our particular option was rapidly
approaching, the probability that our contracts would still increase
substantially in value had already been significantly reduced - it
would have been difficult to even close our position near its
original purchase price.
The chart below illustrates that for this particular trade it did
not matter whether you bought puts or calls, nor did did it matter
what expiration date you picked. Because the index traded in a tight
range, all options buyers trading this time frame lost their
premiums.
Let us take a look at some numbers:
- On June 7, 2004, QQQQGK puts (with a $37 strike and July
expiration) cost $1.00. On July 7, 2004, the same option traded at
an average price of $0.80 – i.e., a reduction in value of about 20%;
- On June 7, 2004, QQQQTK calls (with a $37 strike and August
expiration) cost $1.60. On July 7, 2004, the same option traded at
an average price of $1.10 – i.e., a reduction in value of about 30%.
- We sold our QQQQ calls at $0.65 per contract and took a 54% loss.
The time
value of our options had decayed to the
point where it was better to take a loss
rather than wait for a potential
turnaround (but risk even higher
losses).
It is
difficult to trade options when an index
moves in a narrow range; in this
situation, the time factor – one of the
most powerful factors affecting options
prices – works heavily against you. You
can see from the chart below that since
February 2004, the NASDAQ-100 has been
trading in a very tight range. Upon
closer inspection, you can discern two
small down trends and two small up
trends, with each “mini trend” lasting
more than a month. We call this type of
market – where the index moves in a
small trading range for a prolonged time
- the "options buyers killer". In this a
market environment, it really does not
really whether you buy puts or calls; if
you are not fortunate enough to be
buying very close to a (coming) reversal
point (and taking your profit rather
quickly), –you will lose.
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