Jim, thought you might be interested in this article on the mini-qqq, called the minx (MNX)- in case you didn't know about it. (Compliments of L3)
Minx or Cubes?
By Frederic Ruffy
8/17/00 8:00:00 PM
Here's another word to add to your vocabulary - "Minx". Webster's defines
it as "1) A wanton woman or 2) A pert or flirtatious girl." But now the
word has another meaning and, believe it or not, it actually has to do with
index options.
On August 14, 2000, the Chicago Board Options Exchange (CBOE) started
trading options on the Mini-NDX index (MNX), or, as it is known in the
trading pits, the "Minx". The NDX, you will recall, is the NASDAQ 100
index-or an average of 100 of the largest, non-financial, stocks listed on
the NASDAQ. The Mini-NDX is 1/10th of the NDX. So, for instance, if the
NASDAQ 100 is currently trading at 3800, the Mini-NDX will be trading at
380.
Why has the CBOE launched options trading on a mini version of the
NASDAQ 100? The Minx is perhaps the CBOE's response to the growing
popularity of the American Stock Exchange's NASDAQ 100 Tracking Stock
(QQQ). The Tracking Stock, or "Cubes" as they are sometimes called, is a
unit investment trust that is designed to track the performance of the
NDX. It is not an index, but a pool of money that, in order to track the
performance on the NASDAQ 100, invests in the same securities of the
index. Shares of the trust trade on the American Stock Exchange like a
stock. Options (puts and calls) also trade on QQQ and have become one of
the most actively traded options contracts today.
The growing popularity of the American Stock Exchange's QQQ options
has pulled business away from the CBOE. The most obvious example is
the dwindling volume in the S&P 100 (OEX) contract. Specifically, in 1994,
the average daily volume on the OEX was 300,000. Today, that number is
less than 100,000. Meanwhile, options activity on the QQQ has increased
significantly. In fact, total open interest (or the net total of outstanding
open option contracts) is two times greater on the QQQ than the OEX (as
of this writing 720,000 vs. 276,000). No wonder CBOE is launching a
competing product, and interestingly, Minx contracts will trade in the OEX
pits.
The Mini-NDX index, however, is not identical to NASDAQ 100 Tracking
Stock. There are some important differences between the two. As noted
earlier, the QQQ is not an index, but a unit investment trust-or exchange
traded fund, index share, or tracking stock. In effect, it is a pool of money
that buys the stocks of the NASDAQ 100. The total value of the stocks,
divided by the total number of shares of the fund, equals the value of one
share. That is, if the value of the trust equals $12 million and there are 12
million shares outstanding, the value (known as Net Asset Value) of one
share equals $1.00. At the same time, shares of the trust trade (are
bought and sold) on the American Stock Exchange. Therefore, they are
subject to the forces of supply and demand in the marketplace. As a
result, there will be times that shares trade at a discount or premium to
the Net Asset Value. Those of you who are familiar with closed-end funds
have seen this before.
Therefore, an important distinction between the QQQ and Minx is that one
is a unit investment trust and one is a smaller version of an existing index.
Both track the NASDAQ 100 index, but because of the nature of the
investment, the QQQ will sometimes trade at a discount or premium to the
actual index. Consequently, and intuitively, it seems that there will be
somewhat greater volatility associated with the QQQ than the Mini-NDX.
Another difference is that, while the QQQ options settle American Style,
options on the Mini-NDX are of the European variety. This means that
QQQ options can be exercised any time prior to expiration. Minx options,
however, can only be exercised at expiration.
An important similarity is that both the QQQ and the MNX track the same
index. The top thirty components of the NASDAQ 100 are listed below.
Because it is a capitalization-weighted index and, therefore, the larger the
company the greater it's weighting in the index, the top 15 companies
account for roughly half the index's total value. The top 30 represent
almost three-quarters of the index. Most are technology companies.
Therefore, the NDX, MNX, and QQQ are all relatively good proxies for
America's technology sector.
Table 1 -- NASDAQ 100 Top 30 Components (by Market Capitalization)
Given the nature of the NDX, options on the index can be used as a
hedge. Specifically, hedging with NDX options is a matter of buying the
right amount of puts to offset any loss in a stock portfolio. Puts make
money when the underlying security or index moves lower. To illustrate,
consider the following hypothetical situation. (The example below is only an
example of a trading strategy. Furthermore, there are other factors to
consider not covered in the example: transaction costs, taxes, and
commissions.)
Assume that in January 1998, an investor had a $50,000 technology stock
portfolio and by March 2000 the portfolio had increased in value to
$200,000-or matching the performance of the NASDAQ 100 index. Now,
she is concerned about forthcoming market volatility and wants to protect
her holdings without incurring taxes and unnecessary transaction costs. It
seems to her that the best solution is to use index put options that make
money during a decline in the technology sector. She chooses MNX
options. With the NDX trading at 4000, the Minx is quoted at 400. How
many options will she have to buy? The answer is to divide the value of the
portfolio ($200,000) by the value of Minx (400 x $100 multiplier =
$40,000). The answer is five. In this situation, to offset any potential
losses in her portfolio, the investor can buy five MNX put option contracts.
Of course, unless the portfolio is identical to the NASDAQ 100, the hedge
will not be perfect. There will be something known as "Tracking Error."
That is, the price behavior of the securities in the investor's portfolio will
not move exactly the same as the index. In addition, there is a cost to
owning the puts. For example, if the investor wants to buy the MNX
October "at-the-money" puts (in this case, at-the-money is the same as
the current price-i.e. $400) and the current price for the one month
at-the-money put is $25 a contract, the total cost would be $12,500 ($25
x 5 x $100 multiplier).
Therefore, there is a cost associated with using protective puts and the
hedge is not always perfect, but both the MNX and QQQ can offer
technology stock investors protection in case of a downward slide in the
market. So, which is a better hedge: Minx or QQQ? There are several
factors to consider. First, how are the options priced? If you are hoping to
hedge a portfolio with, for instance, the October "at-the-money puts",
which is cheaper (has a lower implied volatility) the MNX or QQQ? In
addition, how long do you want the protection? Both the MNX and QQQs
have options expiring in the March quarterly cycle (March, June,
September, and December), but the Mini-NDX lists up to three additional
months and the QQQ only two. Therefore, there may be an extra month
available on the MNX contract. Given the greater volume, the QQQ options
are more liquid than the Mini-NDX contracts. So the greater trading
volume makes Cubes more attractive. However, do you get better
execution on a particular exchange? While the QQQ trades on the
American Stock Exchange, Minx trades in the OEX pits at the CBOE.
In summary, Minx is a new index option and is the CBOE's answer to the
American Stock Exchange's Cubes. Both are designed to match the
performance of the NASDAQ 100 index, but there are some important
distinctions. Despite the differences, both can be useful in hedging a
technology stock portfolio. Choosing between the MNX and QQQs is
ultimately a personal choice, but there are a number of factors to consider:
the price, exchange, liquidity, and expiration month.
Frederic Ruffy
Senior Writer & Index Strategist
optionetics.com |
