Over the years, the most frequently used ETF in my portfolios has been Invesco QQQ Trust (Nasdaq: QQQ). Premium members have noticed that, lately, a relatively new eligible security in our Premium Members ETF Reports has been QQQM (Invesco Nasdaq 100 ETF). Both are based on the Nasdaq 100 Index. This article will highlight the similarities and differences between these 2 securities and offer guidance as which is best suited for our option-selling portfolios.
What is QQQ?
QQQ is an exchange-traded fund based on the Nasdaq-100 Index®. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
What is QQQM?
QQQM is an ETF based on the NASDAQ-100 Index (Index). The Fund will invest at least 90% of its total assets in the securities that comprise the Index. The Index includes securities of 100 of the largest domestic and international nonfinancial companies listed on Nasdaq. The Fund and Index are rebalanced quarterly and reconstituted annually.
What are the corresponding expense ratios (fees inherent in the securities)?
- QQQ: 0.20%
- QQQM: 0.15%
Option expirations
- QQQ: Has Weeklys & LEAPS
- QQQM: No Weeklys or LEAPS
Similarities
Same underlyings
- Same price performance
- Same implied volatility
- Risk
- Returns
QQQ Advantages
- More liquid
- Tighter spreads
- More expiration choices (3 per week)
QQQM Advantages
- Lower expense ratio
- Less than half the price
Type of investor
Trader: Favor QQQ:
- Large asset base
- Highly liquid
- Narrow spreads
Long-term, buy-and-hold: Favor QQQM
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Price performance comparison chart (yes, there are 2 lines in this chart- no difference)
QQQ & QQQM 1-Year Comparison Chart
Implied volatility comparison (no difference)
QQQ & QQQM Implied Volatility Comparison
Option liquidity and strike choices (advantage QQQ)
QQQ: Greater Liquidity and More Strike Choices Than QQQM
Return on option (ROO)- no significant difference
QQQ & QQQM Initial Calculations
The BCI Trade Management Calculator shows a slight difference in the initial calculations (brown cells). This was due to 1 strike being slightly in-the-money: the other slightly out-of-the-money. Overall, there is no difference in expected returns.
Discussion
For short-term option-selling, an edge goes to QQQ because of its liquidity advantage and abundance of expiration choices. If capital is limited, QQQM may be a more practical selection. For long-term investing, a very slight edge to QQQM because of its lower expense ratio.
Recovering markets (Fridays market aberration aside)
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Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
I’ve just completed reading your book The Complete Encyclopedia for Covered Call Writing. Thank you very much for such valuable information. And I am continuing my education in writing covered calls by listening to your blogs and other materials.
Thank you,
Thomas
Upcoming events
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Thursday September 15th, 2022
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Visit Alan, Barry and members of the BCI team at Booth # 415
Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions
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Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*
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Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
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- Section III
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- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
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- Section VI
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This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
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- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Alan, If you see OTM calls as bullish, ITM calls as slightly bearish, and Puts as bearish……..where do you lean at this time?
best,
JP
JP,
I lean slightly defensive. I feel that Friday’s reversal was an overreaction to Fed Chairman Powell’s interest rate comments as August is typically a time of consolidation (sideways movement) for the stock market.
My current portfolios contain an equal # of ITM and OTM calls and puts targeting 2% per-month or 0.5% per-week. I view these as leaning slightly defensive and hope to take more aggressive positions for the December contracts depending on the market reaction to the Fed’s September 21st meeting. Of course, other factors may play a role but for now count me in the “cautiously optimistic” category moving forward.
Alan
Alan,
I am on the verge of retiring and have been paper trading your BCI method for almost a year now. All in all, I have done well and really value the stock reports. But, I have a tendency to be too conservative and haven’t chosen OTM calls often enough. I’m working out a two prong approach to increase my OTM positions.
First, I’m comparing the stock’s 20 day ema to the SPY over the past few weeks to decide on moneyness. Next, I’m calculating the possible price range on expiration day using IV. Does this seem like a reasonable method for choosing a strike price?
My second question has to do with hitting doubles. I entered a paper trade on 8/15 buying RGEN at 254.27 and sold the Sept 16th 270 call for 8.30. I’m pretty bullish on this stock if not on the market in general just yet. I knew the stock would probably have some price swings but its 20day ema has been outperforming the SPY so I thought an OTM call was appropriate for the 5 week trade.
Not surprisingly the stock took a dip to 222.59 on decreasing volume last week and my BTC 20% order was filled on 8/23 buying back the call for 1.65.
Now, I’m at the plate deciding when to swing for a double. The stock is on the rise again and closed yesterday at 237.65. The 21 day IV predicts it could go as high as 262.98. I’m looking at the 250 call now for the double. The 260 call doesn’t have much open interest.
Is this a good time to hit a double or should I wait for the technicals to improve? The stochastics has turned up but the MACD is still in negative territory.
Thanks,
Bill
Bill,
Congratulations on your impending retirement. It’s time to make some money from the comfort of your home.
Yes, factoring in price performance comparison with the overall market along with IV calculations of the expected price movement are reasonable approaches to strike selection. I would also add in overall market performance (market tone in our reports).
Using implied volatility will establish an expected trading range with an 84% probability of accuracy. Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
The BCI Expected Price Movement Calculator is located on our premium site in the “resources/downloads” section (right side; scroll down to “E”).
“Hitting a Double: I can’t give specific financial advice, but I can give you some BCI guidelines to consider:
1. We keep open the possibility to “hit a double” until there are 2 weeks remaining in the contract so that leaves us 1 more week before resorting to rolling-down which is what selling the $250.00 call will result in.
2. Selling the $250.00 call will lock in a $4.27 per-share loss on the stock side. Yes, this will be more than compensated for on the option side, but will this be necessary? Maybe, but we have another week to decide, especially if our outlook is bullish as you state.
3. Having rules and guidelines will work out for us in the long run. They throw the odds of successful outcomes dramatically in our favor. This does not guarantee the success of every trade. In the BCI methodology, we favor “hitting a double” in the 1st 2 weeks of a 4-week contract and in the 1st 3 weeks of a 5-week contract.
That said, I am impressed with your motivation and due-diligence, sure recipes for success.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 08/26/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Hi, Alan,
I met you at an AAII meeting in Sarasota a number of years ago.
I have always wondered why you haven’t been selling WEEKLY calls. it seems more lucrative than waiting weeks until expiration. If you have addressed this subject, I missed your explanation.
Thank you.
Richard
Richard,
I do use Weeklys in a few of my option-selling portfolios. I favor Monthlys in a majority of my portfolios. There is no right or wrong here as both are terrific ways to generate cash flow in a low-risk manner.
There are pros & cons to Weeklys and Monthlys. For example, Weeklys may create opportunities for greater annualized returns and allow us to circumnavigate around ex-dividend dates and earnings reports.
Monthlys have greater liquidity (generally) and therefore, tighter bid-ask spreads, as well as affording us more time to manage our trades.
Here are links to 2 of the dozens of articles I have published regarding Weeklys:
https://www.thebluecollarinvestor.com/portfolio-overwriting-with-weekly-options/
https://www.thebluecollarinvestor.com/creating-a-portfolio-of-weekly-cash-secured-puts/
I hope to see you again at one of my in-person events in the future.
Alan
Thank you, Alan, for your response and for sending those articles. I do appreciate receiving your weekly reports each Sunday.
Richard
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
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Alan and the BCI team