Searching for Pure Technology Plays

The Select Sector Technology SPDRs (XLK Quote) are among the most liquid technology plays available today. The XLK is an exchange-traded fund, or ETF, and shares can be bought and sold like stock. Unlike the Qs, Technology SPDRs include the technology components of the S&P 500 index. It is one of nine Select Sector SPDR funds. Together, the nine funds contain all 500 stocks from the S&P 500.

Options on XLK are actively traded and liquid. In addition, strike prices are at 1-point increments, and this helps when establishing more complex trades like straddles, strangles and diagonal spreads. Finally, XLKs settle American-style, which means that exercise and assignment can occur at any time before expiration, and for physical delivery of XLK shares.

Option strategists can also trade the technology sector via the iShares Technology Fund (IYW Quote). This exchange-traded fund is designed to mirror the performance of the Dow Jones U.S. Technology Index. Shares can be bought and sold like stocks, and therefore option settlement also involves the physical delivery of shares. IYW settles American-style. These options are not extremely liquid, however, and there are no expiration dates beyond August 2003.

The iShares Goldman Sachs Tech Fund (IGM Quote) is another ETF that can offer traders exposure to the technology sector. It is designed to correspond to the price and yield performance of the Goldman Sachs Technology Index. Options trade on the American Stock Exchange, but see relatively little trading activity. Like other exchange-traded funds, IGM options settle American-style and for shares.

In addition to exchange-traded funds, the Philadelphia Stock Exchange, the American Stock Exchange and the Chicago Board Options Exchange also list options on sector indices. Examples are the Philadelphia Stock Exchange/KBW Bank index, or BKX; the CBOE Internet Index, or INX; and the American Stock Exchange Biotechnology index, or BTK. There are a few differences between these index options and ETFs. For one, indices cannot be bought and sold like shares of stock. Therefore, option settlement involves cash delivery, not shares. In addition, most index options settle European-style, and that means exercise and assignment can only take place at option expiration.

The Morgan Stanley High Technology Index, or MSH, is an example of a cash index. It includes 100 large-cap tech stocks. Unlike the Nasdaq 100, it does not include stocks from sectors other than technology. MSH options trade on the American Stock Exchange and are among the more liquid technology-related cash indices.