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At 3:34 PM -0600 7/9/01, Gary Fritz wrote:
> > With QQQ at 42, the July 46 call (4 strikes out-of-the-money) has
>> a B/A spread (slippage) of 1 tick,
>
>But that 1 tick is the difference between $0.25 and $0.30 --
>percentage-wise that's an ENORMOUS spread. If I scale that up to NQ-
>equivalent prices, that's like having a b/a of 1545 / 1854 in the NQ!
>
>Unless I've grossly misunderstood something, you're never going to
>replace futures trading with a spread like that. If you're only
>buying the call as insurance with no intentions of trying to make a
>profit on it, that might be a lesser concern, but...
You are missing it. <g>
I cannot imagine anyone buying a July 46 call with the QQQ at 42
right now. It would have to move over 10% up (over 46) in a very
short time to be worth anything at expiration. But say you expected a
20% increase to 50 by expiration. The call would then be worth $4.
Your gain would be 4.00 - 0.25 = 3.75 or 15 x your investment
(neglecting commissions) at 0.30 the profit would be 3.70 or 12.3 x
your investment. Whether you paid 0.25 or 0.30 is immaterial. If it
doesn't move up, you lose your 0.25 or 0.30. Not too likely with such
a short time to expiration but probably better odds than a lottery
ticket...
> > The 38 calls (4 strikes deep in-the-money) show a market depth of
>> more than 5000 on each side, with a B/A spread of only two ticks...
>> Though the B/A spread [ on the July 32 call] has widened to 4 ticks...
>
>Those spreads are much more reasonable -- 2.2% and 1.9% respectively.
> But it's still almost 100x bigger than the typical 1-tick (0.5-
>handle) spread in the NQ.
>
>So even with the smaller 2% spreads, that's still the equivalent of a
>35-handle cost in the NQ. I don't think you'd want to try to trade
>the QQQ options in place of the futures, with costs like that. But
>you said in a previous note that you COULD use the QQQ and OEX for
>day trading of options. If you can make money with a 35-handle (or
>worse) penalty, you're a better trader than I am.
Buying in the money options buys you leverage.
The 38 calls would cost you 4.50 (neglecting commissions). With QQQ
at 42, the intrinsic value is 42 - 38 = 4 and the time value = 0.5
for the total value of 4.5.
A 10% ($4) move in QQQ will result in about a $4 move in the option
price less 0.5 loss in time value by expiration so the final value
would be 8 at expiration. You made 3.5 on an investment of 4.5 = 78%
for a 10% change in the underlying QQQ for a leverage of 7.8 to one -
very similar to what you get with futures - and the most you can lose
is your premium if the market tanks, unlike futures.
This is only two of the simplest uses of options. There are many more
sophisticated strategies.
Bob Fulks
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