[On the QQQ put option play] why [buy options] so deep in the money? There are only 578 open interests at today's close and they are expensive for average investors. I understand the time decay on owning an option works against me (vs. selling). What guidelines do you use in determining the strikes you are interested in? (November 8, 2001)
Put plays are usually faster than upside plays. Why? Because when investors decide to sell in mass, no investor wants to be the last one out of the door. So, we don't anticipate being in the play that long. That being the case, we want lots of movement on our options. With the OEX or SOX, being full strength index options, the movement is fast so we do not have to go too deep in the money to get the movement on our options. On the fractional indexes such as the QQQ and DJX, the movement is not as fast. Thus we look for the options that will give us the best movement when the index moves. For the QQQ, that is usually an option $7 to $10 in the money. That gives us anywhere from a 75 to 85 delta, and that is good movement on the options. Typically on the QQQ you spend $8 for a 75 delta option. We are not then gambling on a bigger move than what the chart shows us will happen. We see the room to the downside, we see the topping action, we get the option that has a good delta so we can grab the lion's share of that move as fast as possible. We could have picked up the $47 strike and saved a bit and had more open interests. Either way, QQQ options are very liquid and we have never had a problem getting filled on an order.
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