Searching for Pure Technology Plays

Today's most actively traded options contract is the Nasdaq 100 Unit Trust (QQQ). Many investors consider the QQQ as a play on the technology sector. However, the Nasdaq 100 includes not only technology stocks, but also a number of biotech, retail and other nontech sectors. Although a large number of tech companies are in the Nasdaq 100, it isn't really a pure play on tech. Fortunately, strategists seeking to place trades strictly on the tech sector do have a few options available.

Options on the QQQ, also known as the Qs, made their debut in 1999. At that time, technology was America's favorite sector, and companies like Microsoft (MSFT), Intel (INTC) and Cisco (CSCO) became the most actively traded stocks. The QQQ became a benchmark for the performance of these large-cap tech stocks. Investors could buy and sell QQQ shares like stocks, but instead of representing ownership in just one company, the Qs offered investors a means of owning 100 different stocks in just one share.

The value of the QQQ is derived from the Nasdaq 100 index. To be precise, it is equal to 1/40 of the NDX. The Nasdaq 100, in turn, represents the 100 largest nonfinancial companies trading on the Nasdaq stock market. Therefore, when QQQ options started trading in 1999, large-cap tech companies like Oracle (ORCL), Microsoft, Intel and Cisco dominated the index.

Today, however, the Nasdaq 100 has a different look. Since the collapse of the technology sector over the past three years, less glamorous names like Starbucks (SBUX), Bed Bath & Beyond (BBBY) and Paychex (PAYX) have replaced many of the large technology companies in the Nasdaq 100. Simply put, during the past three years, the nature of the QQQ has changed: It is no longer an index dominated by large technology companies.

Option strategists seeking to participate in the rise and fall of the technology sector might want to consider using different trading vehicles. Because of the proliferation of different products over the past two years, there are a number of alternatives to the QQQ that do consist solely of technology-related stocks.