Trading the Nasdaq-100 Index

Nasdaq Stock Market

The Nasdaq-100 Index (NDX) is an index composed of 100 non-financial companies listed on the Nasdaq stock market. The Nasdaq-100 Index was launched in January 1985. The index is calculated on a method based on proportionate capitalization weight of each of the 100 companies.

QQQQ Stock

And because the calculated value is high to be traded competitively by many stock traders, its value is divided by 40 to represent the Nasdaq-100 Index Tracking Stock (QQQQ). QQQQ is therefore a stock that represents ownership of a long-term unit investment trust which is as good as holding a portfolio of the equity securities that comprise the Nasdaq-100 Index. Rather than owning the 100 stocks that comprises the Nasdaq-100 Index, you can just have a portfolio of a single stock which is QQQQ.

Nasdaq Stock Market

The Nasdaq-100 Index (NDX) is an index composed of 100 non-financial companies listed on the Nasdaq stock market.
The Nasdaq-100 Index (NDX) is an index composed of 100 non-financial companies listed on the Nasdaq stock market.

QQQQ is as Good as a Stock

QQQQ is as good as a stock; it pays dividends and has options. Rather than having a portfolio of the 100 stocks that comprises the Nasdaq-100 index, you can instead have QQQQ and benefit from low fees, instant pricing and tax advantages among other attractions.

QQQQ Stock Options

QQQQ as a stock has options which are just like any other equity options. 100 options of QQQQ make one contract. The minimum options that you can buy or sell are one contract – meaning QQQQ options have a 100 multiplier. If therefore QQQQ is trading at $50, by buying 1 contract you are actually hedging $5000 of QQQQ equity exposure. QQQQ options have very high trading volumes which make them very ideal for many traders as it is very easy to get filled and the bid ask slippage is low compared to other options. The options are American style and can be exercised any time which will result in delivery of QQQQ shares.

Nasdaq-100 Index (NDX) Options

There are options that are based on the full Nasdaq-100 Index, called Nasdaq-100 Index Options. Unlike QQQQ Stock Options which settlement in delivery of QQQQ stock, NASDAQ-100 Index Options are settled in cash. 100 Nasdaq-100 Index Options make one contract. The minimum options that you can buy or sell are one contract – meaning Nasdaq-100 Index Options have a 100 multiplier. If therefore Nasdaq-100 Index is trading at $2000, by buying 1 contract you are actually hedging $200000 of Nasdaq-100 Index equity exposure. Nasdaq-100 Index (NDX) Options ha low trading volumes.

Mini-Nasdaq-100 Index (MNX) Options

Mini-Nasdaq-100 Index (MNX) is 10% of the value of Nasdaq-100 Index (NDX). There are options that are based on Mini-Nasdaq-100 Index called Mini-Nasdaq-100 Index Options. Mini-Nasdaq-100 Index Options are cash settled. If Nasdaq-100 Index is trading at $2000, Mini-Nasdaq-100 Index will be $200. 100 Mini-Nasdaq-100 Index Options make one contract. The minimum options that you can buy or sell are one contract – meaning Mini-Nasdaq-100 Index Options have a 100 multiplier. If therefore Nasdaq-100 Index is trading at $2000, by buying 1 contract you are actually hedging $20000 of Nasdaq-100 Index equity exposure. Mini-Nasdaq-100 Index (MNX) Options has low trading volumes.

Why Choose One in Favour of the Other?

One contract of Nasdaq-100 Index (NDX) Options, 10 contracts of Mini-Nasdaq-100 Index (MNX) Options or 40 contracts of QQQQ Stock Options represents more less the same hedging. Why then should you choose one in favour of the other? You would have to consider many factors such as the commission charges, bid - ask slippage, volume, strike prices spacing, exercise styles, volatility, your financial strength, interest rates, etc., etc.

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Comments 2 comments

Aya Katz profile image

Aya Katz 7 years ago from The Ozarks

Ngureco, thanks for this informative hub. You say that QQQ is as good as stock. But does stock in a company have any real value besides our ability to trade it and hope to make a profit in the sale? Or does stock also have the added value of giving one a vote in how a particular company is run? Does QQQ give voting rights?


ngureco profile image

ngureco 7 years ago Author

Hello, Aya Katz. Thank you for your opinion.

The price of a stock has more to do with perception than the actual value of the company. Never fall in love with a particular stock. A stock is not a thing if it’s not making money to you. Throw it away at market price order.

When you buy a stock and you do not want to lose you can either (a) sell it at a profit if the price go up beyond the price you bought it, or, (b) if the price go down, you can hold it for as long as it may take – during this time you only consider the number of shares you own and not the value of your shares.  

If you invest in stocks of a particular company and then the next day the CEO is spotted in Seychelles with his girl friend misusing the company’s money, then the stock will gap down and you will lose your money even if you had placed automatic stop loss orders. That’s why you need voting rights to vote out the CEO.

If this same company is a component of QQQQ, its fall in price will be insignificant to the price of QQQQ as there are other 99 well managed companies. That’s why your voting rights may not be important in the performance of your money in QQQQ. QQQQ will never have those abnormal gap openings and your automatic stop loss orders will hold.

Again thank you, Aya Katz.

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