One of the most common questions new traders face is what to trade. As an example they could ask what to choose for investment, QQQ (Nasdaq 100 index tracking stock) or SPY (S&P 500 index tracking stock).
We have created different systems (QQQ and SPY) to have some diversity and to provide an option to our subscribers to select a product they fill more comfortable with. At the same time each system (QQQ and SPY) has alternative options symbols stated in each signals which gives an ability to manage the risk by selecting riskier or more conservative options to trade our signals.
There is no much difference between our QQQ and SPY uncovered options trading systems. process of signal generation for each system is quite similar - both systems use combination of volume, volatility, price and advance/decline technical indicators to generate signals. In many cases QQQ and SPY signals will go along each other, they could be generated at the same time or with small gap in time. The main difference in the analysis is that QQQ signals are based on the Nasdaq 100 index analysis and SPY signals are generated from the results of the S&P 500 technical analysis. Since the S&P 500 and Nasdaq 100 indexes do not always move in the same direction and with similar volatility, there could be periods when one system may remain in cash while other may participate in the market movement.
Strategy of selecting option strike and expiration for our signals is similar for both systems as well and in general there no big difference what system or what combination to choose for investing.
The main difference between QQQ and SPY uncovered options is that they have different margin requirements. The margin requirements formula for uncovered options greatly depends on the price of the underlying stock. Therefore, SPY uncovered options margin could be 2 - 2.5 times higher. Furthermore with the same funds you will be able to sell short more QQQ option contracts in comparison to the selling SPY option contacts. On the other hand, since the strategy of the selection of the strike price and expiration date is similar for both systems, you will receive higher premium for a SPY option contact in comparison to a QQQ option contact. At the end, there will be some difference (not huge) in the premium you receive for selling short whether QQQ or SPY options.
Based on the margin requirements, the preference of a system choice may depend on the amount of allocated funds as well. Because margin on uncovered options is changing all the time we may give you only a rough example:
Again, the numbers above are very rough and should not be considered as a guideline. We put hem here just to show how margin may affect your choice of a trading system when it comes to trading uncovered options.
When it comes to trading behind our system and when it is not connected to the margin requirements of uncovered options or when an investor intend to allocate more than $100K into our trading system, the difference between QQQ and SPY is not big.
Most of the time the Nasdaq 100 index moves along to S&P 500 index. Sometimes novice traders may run into misleading conclusion that if you trade SPY you could make more on each percent of the profit, simply because SPY is two-three time more expensive than QQQ. Yes, if QQQ stock is traded at $40 per share and SPY stock is traded at $100 per share then on each percent of QQQ profit you would make $0.40 on a QQQ stock and on each percent of SPY profit you would make $1 on one SPY share. However, it is not as simple as it looks like.
In real trading a trader operates by a portfolio. For instance, if a trader intends to invest $1,000, then in the same case when QQQ stock is traded at $40 per share and SPY stock is traded at $100 per share this trader would allocate $1,000. This trader would be able to purchase (invest into) 10 SPY shares or 40 QQQ shares. Now, if this trader receives 1% profit in both cases it is going to be $10 which is 1% from invested $1,000. So, it does not really matter whether you receive $1.00 profit per share on 10 shares or you receive $0.40 profit per share on 25 shares. The result is the same - you will pocket the same profit.
As you see the question "What gives bigger profit QQQ or SPY?" is wrong. A trader should not select trading vehicle on the assumption that this stock is more profitable than another stock. The first and the most correct question is what do you know the best? In the current example with a choice between QQQ and SPY stocks the question could be very simple: "What analysis provides you with better result? Is it S&P 500 analysis or is it Nasdaq 100 analysis?". If you are more familiar with S&P 500 index technical analysis then you should definitely choose SPY for investment. Yet, if you feel more confident by analyzing Nasdaq 100 index then the correct choice would be selection of QQQ stock.
If your technical analysis or your trading system generates similar result for both QQQ and SPY stocks then you may go into deeper analysis of what to select for investment. The second and usually the last question is where you would pay fewer commissions? Those are all the questions that should be asked when a trader selects a stock for investment.
Naked options trading is very risky - many people lose money trading them. It is recommended contacting your broker or investment professional to find out about trading risk and margin requirements before getting involved into trading uncovered options.