Saturday, April 01, 2006

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
“Hi, the price is down!”
3. Our Plan for Next Week
4. Get Out Tomorrow


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