This is a weekly column focusing on ETF options by Scott Nations, a proprietary trader and financial engineer with about 20 years of experience in options.
Sixteen years ago, QQQ was the ETF everyone wanted to own. Now known as the PowerShares QQQ (QQQ | A-65), it debuted in March 1999 as the Nasdaq-100 Index Tracking Stock before sponsorship was transferred to PowerShares in 2007.
QQQ is still a power among ETFs, with more than $40 billion under management as of the close of trading on Tuesday.
But the largest components of QQQ reported earnings after the close on Tuesday, and one institutional options trader bought a put option spread to get lower cost exposure to the sell-off in QQQ. In doing so, he showed how buying a put option spread reduces the cost of exposure, by nearly 50 percent in this case, at the cost of limiting the amount of potential profit.
You can see that QQQ has performed magnificently over the past three years:
It would be easy to think that QQQ is due for a pullback, and one way to profit from a pullback would be to sell QQQ short. But that generates the potential for huge losses if QQQ rallies. So one institutional trader bought a put spread early in the trading day on Tuesday and got bearish exposure while defining his risk.