The Last Review

An Option Strategy Example 5: QQQQ

In my first article “Time to Play Index --- QQQQ”, I showed a picture that compared QQQQ with Dow and NASDAQ. At that time, we could see a gap between the QQQQ and Dow or NASDAQ. I wrote that “The trend should be: Dow is down and QQQQ is up relatively.”

Let’s check the chart today, after 6 business days, at the same time period.

Now the Dow and QQQQ met together and the gap disappeared.

As a real life example, we need to review our investment. Because of Google, my article “Get Out Tomorrow” was delayed on Tuesday, so someone might miss it. Therefore we have to set 3 different scenarios.

1. The worst scenario
If a reader read my article after 2:00 PM on Monday when the market had felled, he/she sold the 6 QQQDP, he/she should get (6*0.35)*100 = $210. (0.35 was the lowest on that day, it is the worst case).

Because of the closing price of QQQEP is $1.10 as of 3/31/06. The whole portfolio is: (2*1.1)*100 + 210 = $430

We should have a 7.5% margin.

2. As I suggested
If a reader read my article and took the action earlier on Tuesday, he/she can sell QQQDP at about $0.55, the same portfolio as of today would be:
(2*1.1 + 6*0.55)*100 = $550

We should have a 37.5% margin.

3. The best scenario
If a reader missed the article and did not take any action, if we use the closing price as of 3/31/06, this portfolio would be:

(2*1.1 + 6*0.65)*100 = $610

We should have a 52.5% margin.

My estimation does not include the trading cost that will reduce our final gain a little; and it does not count at the higher price which can give much higher result. In fact, if one can handle it well technically, he/she will get much better result at all 3 cases above.

If you look the chart, there is a gap between QQQQ and NASDAQ also, so technically the QQQEP might have room still. Since I don’t want to take this tracking too long, I would rather stop at this point.

This time, the scenario 3 seems the best. But please keep in mind that there was a lucky factor. From trading skill point of view, I encourage you to read my articles again and adopt the second approach when there is a similar situation next time. Please keep in mind that preventing a potential lost is more important than getting a profit.

Regardless, for about a week, any result is not bad at all.


All related articles:
1. Time to Play Index --- QQQQ
2. “Hi, the price is down!”
3. Our Plan for Next Week
4. Get Out Tomorrow