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Gary,
let me preface this by stating that I am not advocating day trading QQQ
options in the same sense that one would be scalping the NQ for a quick 10
or 20 points profit. QQQ options do lend themselves very well to short-term
trading from, say, a 30-min. chart, holding a position for several hours to
a few days, but not to scalping.
Fortunately for the QQQ traders, slippage is not as bad as you indicate in
your post. However, it does exist, and an honest appraisal is in order. Let
us go through the QQQ vs. NQ numbers together, step by step, and try to work
out the correct scale.
(1) With current prices, any 1-point move in the QQQ corresponds to about a
40-point move in the NQ (actually that number is about 40.8, but let us use
40 here for the sake of simplicity).
(2) How much is a 1-point move worth per share or contract? In the QQQ, 1
point is worth $1 per share, just like in any other stock. Since one stock
option is the right to buy or sell 100 shares, a 1-point move in QQQ
*options* is worth $100 per option contract. In the NQ, 1 point is worth $20
per futures contract.
(3) It follows that one tick in QQQ options (0.05 points) is worth $5, and
one tick in NQ futures (0.5 points) is worth $10.
To avoid introducing any bias into this analysis, let us apply the above
numbers to a scalping situation in which the options can't play their
strengths. Suppose we buy 5 NQ contracts, make a quick profit of 20 points
in the NQ, and exit with a gross profit of 5x20x20=$2000. Average slippage
would be 2 ticks per round turn per contract, which amounts to 10 ticks or
$100 for 5 NQ futures.
Now for the QQQ. Because of (1), the 20-pt. move in the NQ corresponds to a
0.5-point move in the QQQ. And because of (2), for the QQQ trade to be
equivalent, we would have to buy 4000 shares in order to make the same $2000
profit on a half-point move in the QQQ. But since we want to do options, and
one option controls 100 shares, we would have to buy 40 QQQ options instead.
We are almost done, but still have to take option delta into account. An
at-the-money option will move only about half a point for every full point
move in the QQQ stock; thus, for a fully equivalent trade we would have to
buy 80 QQQ options, make a profit by having the underlying QQQ stock move
half a point, and exit. According to (3), average slippage per round-turn
would be 2x80 ticks, or $800. This is 8 times the average slippage we would
experience in the NQ. Not 100 times as much, but still a lot.
However, the tables will be turned for a trading system that stays in the
market overnight, or goes for larger profits. Then the increased slippage of
options is perceived by the option trader to be the fair price for their
built-in protective qualities.
Best,
Michael Suesserott
> -----Ursprungliche Nachricht-----
> Von: Gary Fritz [mailto:fritz@xxxxxxxx]
> Gesendet: Monday, July 09, 2001 23:35
> An: Omega-List
> Betreff: Re: The bugaboo of ITM option illiquidity
>
>
> > 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...
>
> > 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.
>
> What am I misunderstanding here?
>
> Gary
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