While the S&P 500 and Dow have rallied to five-year highs,
the technology sector has lagged, and is currently sitting about 4%
below the fall peak. The
PowerShares QQQ Trust (Nasdaq: QQQ)
, anexchange-traded fund (
) that tracks the Nasdaq 100, could provide a diversified way for
investors toprofit while this out-of-favor sector plays catch
One reason I like thisfund is the exposure it offers to
Apple (Nasdaq: AAPL)
, which accounts for a whopping 15% of theindex weight. AAPL is
more than 35% off its September highs, but when thestock stabilizes
and snaps back, QQQwill rise with it.
QQQ's recent month-long range between $68 and $66 targets $71 on
a breakout, which would be a new52-week high for theETF . A full
"V" recovery rally projects a much higher target of $78. The $64
level is an important year-long pivot point, and is just below the
$65 support midpoint of the 2012 highs to lows.
The $71 target is about 6% higher than current prices, but
investors who use a capital preserving, stock-substitution strategy
could make more 50% on a move to that level.
One major advantage of using longcall options rather than buying
the stock outright is putting up much less to control 100 shares --
that's the power ofleverage . But with all of the potential strike
andexpiration combinations, choosing anoption can be a daunting
Simplyput , you want to buy a high-probability option that has
enough time to be right, so there are two rules traders should
Choose an option with 70%-plus probability.
Delta is a measurement of how well an option follows the
movement in the underlying security. It is important to buy options
that pay off from a modest price move in the stock or ETF rather
than those that only makemoney on the infrequent price
Any trade has a 50/50 chance of success. Buyingin-the-money
options increases that probability. Delta also approximates the
odds that the option will bein the money at expiration.
In-the-money options are more expensive, but they're worth it, as
your chances of success are mathematically superior to buying
cheap, out-of-the-money options that rarely pay off.
For example, with QQQ trading at about $67 at the time of this
writing, an in-the-money $64 strike call currently has $3 in real
orintrinsic value . The remainder of any premium is thetime value
of the option.
Buy more time until expiration than you may need -- at least three
to six months -- for the trade to develop.
Time is an investor's greatestasset when you have completely
limited the exposure risks. Traders often do not buy enough time
for the trade to achieve profitable results. Nothing is more
frustrating than being right about a move only after the option has
With these rules in mind, I would recommend the QQQ June 64
Calls at $4.50 or less.
A close below $64 in the stock on a weeklybasis or the loss of
half of the option premium would trigger an exit. If you do not use
a stop, then the maximum loss is still limited to the $450 or less
paid per option contract. Theupside , on the other hand, is
unlimited. And the June options give thebull trend almost five
months to develop.
This trade breaks even at $68.50 ($64 strike plus $4.50 option
premium). That is about $1.50 above QQQ's current price. If shares
hit the modest upside breakout target of $71, then the call options
would have $7 of intrinsic value and deliver a gain of more than
Action to Take -->
Buy QQQ June 64 Call at $4.50 or less. Set stop-loss at $2.25 and
set an initialprice target at $7 for a potential 56% gain in four
and a half months.
This article originally appeared on ProfitableTrading.com:
"This Out-of-Favor Sector Could Make Traders
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.