The INDEXNASDAQ:.IXIC is the Nasdaq Composite, and along with the Dow Jones Industrial Average and the S&P 500, is one of the most followed indexes in the world. The Nasdaq stock exchange, which opened in 1971, is a place for innovative technology companies to be listed and have their stock traded. Currently, there are about 2,500 total stocks listed on the Nasdaq exchange and the INDEXNASDAQ:.IXIC is a way to track the changes of the entire Nasdaq market. Here are the top 10 stocks traded and available on the INDEXNASDAQ:.IXIC along with their current market cap and industry.
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The Nasdaq is obviously the best gauge for all things technology and biotechnology and is watched by all institutions and professional money managers and traders all day. Why? Because some of the names in this list in the Nasdaq are incredibly correlated to the index.
Makes sense, Apple, Google, and Microsoft move with a 90+ correlation to the Nasdaq. For the rest of this article, we are going to talk about the top three ways to have immediate exposure to the INDEXNASDAQ:.IXIC (Nasdaq) and talk about which ones are right for you.
The Nasdaq Composite
Unfortunately, the Nasdaq Composite ($COMP) is not a tradable asset.
Like most other cash settled indexes, there is no stock to trade. However different from the S&P 500 and the Dow Jones Industrial Average, the Nasdaq Composite does not have any options to trade. This makes the $COMP a completely untradable product.
The good news for us is that there are three products that we can trade every single day if we want direct exposure to the INDEXNASDAQ:.IXIC (Nasdaq). Those are the Nasdaq futures, the Nasdaq 100 Index, and the Nasdaq ETF.
The Nasdaq Futures (/NQ) are the first on our list of INDEXNASDAQ:.IXIC (Nasdaq Composite) replacements and are the only product on our list that can be traded 24/5. The Nasdaq futures are amongst the most active futures and trade during the Globex hours from Sunday night at 6 pm est to 5:15 on Friday afternoon est. These futures contracts are highly leveraged products but do have a lot of liquidity. Remember, liquidity is the number one most important thing to consider before trading any product. If there is no liquidity, we walk away and try to find a new product to trade.
Before we get into liquidity, just how big are these Nasdaq Futures?
To start off, each tick (the smallest distance between two prices) is a movement of .25 points worth $5. There are four ticks in every point making each point worth $20. If each point is worth $20 and the current price of one Nasdaq futures is $5409.25, each contract is worth a total notional value of $108,185 or ($5409*20)+($5*1). That is very large considering span margining in futures only requires investors to put up $4,290 per contract. That is 25:1 leverage for one Nasdaq future.
We now know our first shot at getting direct exposure to INDEXNASDAQ:.IXIC (Nasdaq Composite) in the Nasdaq futures are a giant product. But just how big is their market on any given day. Over the last 50 days, the /NQ futures have on average traded 184,744 contracts. If we take that number and multiply it by the notional value of one futures contract ($108,185) we get an average total notional value of the Nasdaq futures market to be about $19,986,529,640. Nothing says participation like a 20 billion dollar market. With volume this high, the bid/ask spread for the futures is never more than one tick wide. That is what we call efficiency.
While the futures being this liquid is all fine and dandy, we never look at trading a product unless the options market is equally as efficient and liquid. How do the /NQ’s stack up?
Eh…these numbers are not that great. But as long as everything else looks good we can give our blessing for trading Nasdaq futures as a substitute for trading the INDEXNASDAQ:.IXIC (Nasdaq Composite). How about the options expirations? Is there a bunch?
We do have a lot of expiration cycles with at least one occurring every single week. This is great news!
Ultimately, it comes down to the bid/ask spreads of the options contracts. With only about 5,000 contracts traded a day, we would still need to see spreads only a few ticks wide. Let’s check them out.
These spreads look pretty wide, and what’s more is that the open interest numbers are pretty small too.
To make matters worse, with the daily expected move in a new low volatility time being .73% a day, one contract can expect to make or lose within up or down $800 per contract.
For non-experienced traders or those who do not have a few hundred thousand dollars in their accounts, we do not recommend getting involved with the Nasdaq futures to get exposure to theINDEXNASDAQ:.IXIC.
If you do happen to have that much money, the /NQ futures can give you the type of exposure you want however trading in and out of the options market here is difficult. We do not recommend doing this unless you are a professional trader.
If these Nasdaq futures don’t work for you, maybe we can try our luck with the Nasdaq 100.
Nasdaq 100 Index
Since we can’t trade the INDEXNASDAQ:.IXIC (Nasdaq Composite), or the /NQ futures, why not give the NDX a shot?
Go time. Like the SPX, the NDX is a cash-settled index. This means there is no stock to trade and options expire to cash instead of stock.
However, the NDX might be advantageous for some to trade because 40% of the gains no matter what are taxed as long-term capital gains. This does not matter at all to us because the only thing that matters to us and to you is if there is enough liquidity or not.
Let’s see what these options markets look like. Let’s start with volume.
16,532 options contracts is a great number especially considering NDX is a $5000+ index. Total notional value with this many contracts is $89,417,681.49. Not too shabby.
Does the Nasdaq 100 also have weekly options expirations on top of the monthly’s that everyone gets out of the box?
They sure do. Like the Nasdaq futures, the Nasdaq 100 has expirations cycles at least once a week. This is awesome. Everything has checked out so far with. The last thing we need to see if the width between the bid/ask spreads for NDX options. If they are tight, we can crown it the tradable asset to replace the INDEXNASDAQ:.IXIC (Nasdaq Composite).
These are wide…too wide. We cannot trade options that have dollar wide bid/ask spreads. This will only set us up to have to take immediate losses upon executing a trade here.
Maybe the open interest is really great? It would show large institutional interest in the Nasdaq 100 if it did.
And to make matters worse, even with a portfolio margin account, selling at $5400 naked put requires $58,288 in buying power. Even spreads are difficult here as no spread trades can be done with less than a $10 width or $1000 in margin requirements.
Even if you have a portfolio margin account, we do not recommend trading NDX options for anyone as a replacement for trading the INDEXNASDAQ:.IXIC (Nasdaq Composite). It is too large of a product and does not have the level of liquidity necessary to trade.
/NQ and NDX are both not reasonable replacements to the INDEXNASDAQ:.IXIC (Nasdaq Composite). Let’s see if the Nasdaq ETF is a better choice.
To round out our list of possible INDEXNASDAQ:.IXIC (Nasdaq Composite) replacements is the Powershares QQQ ETF. QQQ is one of the highest volume stocks and also is an excellent asset to trade is you want broad exposure to the FANG stocks.
Remember, ALL we care about here is liquidity. We will go through QQQ and see if it has better liquidity than /NQ and NDX.
The first thing we are going to check is stock volume. How does it stack up?
Over the last 50 days, QQQ averaged 17,287,104 shares traded per day. With a current stock price of $131.69, that represents a total notional value exchanged of $2,276,538,725.80. I see you QQQ. With this much volume, there is no close second for who is the technology ETF.
With this much stock volume, we assume the stock bid/ask spread will be fairly small…
ONE PENNY WIDE. It doesn’t get better than this folks.
But what about the ability to have multiple expiration cycles. Remember, stocks get weekly and quarterly expiration cycles if and only if there is enough demand for them. What does QQQ have?
Check. A minimum of one expiration per week. Excellent. Does this mean there is a lot of options volume?
YUP. With almost half a million contracts traded, QQQ finds itself on the top three of the list of most liquid options and on Friday traded a total notional value of $6,424,663,021.
On top of this, it will be no surprise that QQQ has HEAVY interest from institutions judging by the tens of thousands of open interest across the board.
We recommend trading QQQ for anyone. Period. QQQ is THE substitute for not being able to trade and invest in the INDEXNASDAQ:.IXIC (Nasdaq Composite).
What Do We Do Instead of Trading INDEXNASDAQ:.IXIC?
To summarize everything, here were our three contenders:
- Nasdaq Futures /NQ
- Nasdaq 100 Index NDX
- Powershares QQQ ETF QQQ
And to remind everyone since I know this was a lengthy article about finding a replacement to INDEXNASDAQ:.IXIC:
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If this article and the chart right here don’t make it clear enough, I will make it crystal clear for your right now. If you want to trade the INDEXNASDAQ:.IXIC (Nasdaq Composite), you cannot. However, the best replacement for it in the world is the Powershares QQQ ETF. Add it to the list…NOW.