Today's most actively traded options contract is the Nasdaq 100 Unit Trust (QQQ) - Get Report. 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
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
stock market. Therefore, when QQQ options started trading in 1999, large-cap tech companies like
, 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
Bed Bath & Beyond
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.
Select Sector Technology SPDRs
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
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
. 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.
iShares Goldman Sachs Tech Fund
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.
Options on the Amex Computer Technology Index, or XCI, also trade on the American Stock Exchange. This index is designed to represent a cross section of widely held U.S. companies involved in various phases of the computer industry. XCI options do not see much trading activity.
Finally, the Chicago Board Options Exchange provides options trading in the CBOE Technology Index, or TXX. This index includes 30 large-cap technology companies. Like the XCI, however, the CBOE Technology Index options see little trading activity and therefore are not very liquid.
As you can see, there are a variety of ways to play the technology sector outside the QQQs. Unlike the Nasdaq 100, these are pure plays on technology and don't offer exposure to other sectors like retailing, biotechnology or energy. The liquidity of these investment vehicles will vary, and the most actively traded today is perhaps the Select Sector Technology SPDRs. Nevertheless, traders might want to consider all of their options before placing bets on the technology sector with the more actively traded QQQs.
By Frederic Ruffy, senior writer and index strategist at