This segment examines the correlation between the Nasdaq 100 ETF (QQQ) and three of its biggest components to determine if the ETF can be substituted for an individual stock The study will help all traders and may provide an alternative if markets and option markets in an individual stock are too wide.
We can somewhat eliminate specific stock risk and gain liquidity by trading the Index ETF versus a single stock. This also can lower the risk from an earnings release. The question then is what is the correlation between the ETF and a few of its biggest components? We looked at the QQQ ETF and the big 3 in it of AAPL, GOOG and MSFT. A graph was displayed of Implied volatility (IV) over Implied Volatility Rank (IVR) for the major components of the QQQ (Nasdaq ETF). A table was displayed of the 6 month correlations between QQQ, AAPL, MSFT and GOOG.
The big three have a high correlation to the QQQ. Sometimes individual markets can be much wider than the index. A study was conducted from 2008 to present. Using only IV Rank above 50% and 45 days to expiration (DTE), we sold 84% out-of-the-money (OTM) puts in AAPL, GOOG and MSFT and compared it with selling an equivalent number of puts in the QQQ (matching on buying power reduction). A table was displayed of AAPL, MSFT, GOOG and their Totals. The table showed the P/L, win rate, contracts per trade, average IV Rank and average return on capital (ROC) per trade. A second table was displayed with the QQQs, the two tables were compared.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to learn the takeaways and to see if using the ETF in place of a component can be a viable strategy.
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