INDEX INTELLIGENCE: Minxing It Up!
By frederic Ruffy, Optionetics.com
01/15/2001 3:00:00 PM
Options strategists with strong feelings about the future direction of the technology sector now have a number of choices. For instance, the Nasdaq 100 index shares (QQQ), or "Cubes," trade on the American Stock Exchange [AMEX]. Options are listed on that security and the trading of QQQ puts and calls are fairly brisk. The Chicago Board of Options Exchange [CBOE] lists options on both the Nasdaq 100 ($NDX) and the relatively new mini-Nasdaq 100 ($MNX), or Minx. All three offer options strategists the ability to place directional trades on the same index; but are there any advantages to trading one rather than the other?
First, exactly what is the Nasdaq 100? The NDX is a capitalization-weighted index of 100 of the largest non-financial stocks listed on the Nasdaq Stock Market. Therefore, it consists of such familiar names as Microsoft (MSFT), Intel (INTC), and Cisco Systems (CSCO). In addition, it is weighted by market capitalization. Therefore, the larger the company (i.e. shares traded times market price), the greater its overall influence on the performance of the index as a whole. For that reason, the top twenty stocks in the Nasdaq 100 represent roughly two-thirds of its value and the remaining 80 companies account for, you guessed it, one-third of the index.
Options trading on the Mini-index is relatively new. Launched on August 14, 2000, the MNX is the CBOE's answer to the growing popularity of Cubes. The CBOE already offered options trading on the Nasdaq 100, but given the relatively high prices of the options, NDX proved to be largely the domain of financial institutions. The mini-NDX, which is 1/10th the value of the Nasdaq 100, offered smaller investors the opportunity to trade the tech-heavy index.
At the same time, both the Nasdaq 100 and mini-NDX are fundamentally different from the QQQ. In essence, the NDX and MNX are the same. The mini-NDX is simply 1/10th the value of the Nasdaq 100. QQQs, however, are a different animal. In fact, Cubes are not an index, but a tracking stock. In other words, QQQ is an actual portfolio of securities (the stocks of the same companies that are in the Nasdaq 100 and in the exact same proportion). But, unlike indexes, shares of QQQ can be bought and sold on the AMEX like stocks, at prices equal to approximately 1/40th of the Nasdaq 100. These so-called "index shares" have also been created to mimic the Dow Jones Industrial Average [DJIA] and the S&P 500 [SPY] -"Diamonds" and "Spiders".
QQQ is similar to a mutual fund in that it represents a pool of money used to purchase a portfolio of securities (in this case, the stocks of the Nasdaq 100). Investors can invest in that portfolio of securities by buying shares on the AMEX. Those shares, in turn, really have two values. The first is known as Net Asset Value, or NAV. It equals the value of each share based on the value of the stocks in the portfolio. That is, the complete value of the portfolio divided by the number of total shares outstanding. The second value is the price of a QQQ share based on bids and offers on the AMEX. For instance, the most recent quote was $62.00 bid, $62.75 offered. At times, the market price of one QQQ share can diverge from Net Asset Value. When shares fall below Net Asset Value, they are said to be trading at a discount; when market prices rise above Net Asset Value, shares are at a premium.
The distinction between the MNX and the QQQ also means that Cubes will perform slightly differently than Minx. The Mini-NDX index will perform in the exact same fashion as the Nasdaq 100. Given that cubes sometimes trade at a premium or a discount to Net Asset Value, however, they have the potential of making wider price swings (i.e., exhibit greater volatility). Interestingly, however, throughout much of last year, the actual volatility (as measured by the standard deviation of daily price changes) has been greater on the NDX and MNX than on QQQ.
Still, the fact that Cubes have the potential to rise and fall above and below the NAV of the Nasdaq 100 portfolio adds an element of risk. Thus, option premiums on the QQQ should be somewhat higher than on MNX. Are they? No, not really. At times, however, there is a difference between the implied volatility of MNX and QQQ options. The options strategist, therefore, is well served by staying aware of the implied volatility on both. That is likely to be easier in the near future. The CBOE recently announced plans to launch VXN-an implied volatility index similar to VIX. But, instead of gauging the S&P 100 ($OEX) options like VIX, VXN will offer implied info on the Nasdaq 100 options.
Another difference between MNX and QQQ options is the exercise style. Options on Cubes settle American-style-they can be exercised any day prior to expiration. Minx, however, are of the European variety-only exercised at expiration. Therefore, for certain strategies (e.g., credit spreads), there is an early-exercise risk present for the QQQ contract, but not the Mini-NDX.
One of the advantages of Cubes over Minx options is liquidity, although that is changing. QQQ are among the most heavily traded options on the American Stock Exchange. Volume and open interest are quite large and that ensures liquidity for options strategists. MNX options are not as active, but have come a long way. For instance, two weeks after the launch of the contract, open interest was only 57,000 on call options and 46,000 on puts. Recently, it has been as high as 170,000 and 126,000.
In sum, the mini-NDX was the CBOE's answer to the AMEX's QQQ. Both offer the ability to participate in the rise and fall of the Nasdaq 100. Each has certain advantages. The trading is certainly more brisk on Cube options. Still, the exercise style and the fact that Minx is an actual index, and not an index share, offer perhaps enough of an advantage to propel the options strategist to the MNX contracts, over the QQQ. |
