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How Will You Trade Nasdaq 100 Changes?

Published on December 15, 2010

How Will You Trade Nasdaq 100 Changes?

December 15, 2010

Nasdaq 100 index (NDX) will be replacing seven companies next week and the winners are Netflix (NFLX), Whole Foods Market Inc. (WFMI) and 5 more. Usually changes to the index can move stocks up or down as index funds that track its benchmark’s performance will have to buy shares of new companies that join the index and sell share of those being dropped. That is theoretically true but keep in mind that this is an information that’s known to everyone; so can you really benefit from this?

Here is the original annoucement

NEW YORK, Dec. 10, 2010 (GLOBE NEWSWIRE) — The NASDAQ OMX Group, Inc. (Nasdaq:NDAQ) announced today the results of the annual re-ranking of the NASDAQ-100 Index® (Nasdaq:NDX), which will become effective prior to market open on Monday, December 20, 2010.

“The NASDAQ-100 Index is increasingly accepted as one of the world’s most globally recognized benchmarks, the basis of more than 2200 structured products and 22 exchange-traded funds worldwide,” said NASDAQ OMX Executive Vice President John L. Jacobs. “This re-ranking ensures the NASDAQ-100 Index’s relevance as a global benchmark comprised of the world’s most innovative large-cap growth companies that are recognized leaders across a broad range of industries.”

The following seven securities will be added to the Index: Akamai Technologies, Inc. (Nasdaq:AKAM), Ctrip.com International, Ltd. (Nasdaq:CTRP), Dollar Tree, Inc. (Nasdaq:DLTR), F5 Networks, Inc. (Nasdaq:FFIV), Micron Technology, Inc. (Nasdaq:MU), Netflix, Inc. (Nasdaq:NFLX), and Whole Foods Market, Inc. (Nasdaq:WFMI).

The NASDAQ-100 Index is composed of the 100 largest non-financial stocks listed on The NASDAQ Stock Market® and dates to January 1985 when it was launched along with the NASDAQ Financial-100 Index®, which is comprised of the 100 largest financial stocks on NASDAQ®. These indexes act as benchmarks for financial products such as options, futures, and funds. The NASDAQ-100 is re-ranked each year in December, timed to coincide with the quadruple witch expiration Friday of the quarter.

On a cumulative price return basis, the NASDAQ-100 Index has returned 1594% since inception, although past performance is not indicative of future performance.

The NASDAQ-100 Index is the basis of the PowerShares QQQ Trust (Nasdaq:QQQQ) which aims to provide investment results that, before expenses, correspond with the NASDAQ-100 Index performance. In addition, options, futures and structured products based on the NASDAQ-100 Index and the PowerShares QQQ Trust trade on various exchanges.

As a result of the re-ranking, the following seven securities will be removed from the Index:

Cintas Corporation (Nasdaq:CTAS), DISH Network Corporation (Nasdaq:DISH), Foster Wheeler AG (Nasdaq:FWLT), Hologic, Inc. (Nasdaq:HOLX), J.B. Hunt Transport Services, Inc. (Nasdaq:JBHT), Logitech International S.A. (Nasdaq:LOGI), and Patterson Companies, Inc. (Nasdaq:PDCO).

The changes will take place on Dec 20th, the Monday. So How do you trade such an event? Conventional wisdom is to play via Straight calls on those companies that are being added and Straight puts on the ones being deleted.  Let’s get some ideas from the readers on how would you play this upcoming event? pls leave your thoughts in the comments sections. I shall be sharing my thoughts by Friday.

Profitable Trading, OP

15 Comments

  • Avatar SEBBY BOCCACCIO says:

    The Dow seems like it moves up here and there, but yet the strong leaders seem to be getting cheesed, especially the past couple of days. Companies like F5 (FFIV), Baidu (BIDU), Priceline (PCLN), Sohu (SOHU) are breaking their 50 day moving averages or getting near them. Could this mean that some of these stocks have topped for the moment?? The REITS seem liked they topped also. I will be interested to see how you would play situations like this, even if there would be opportunities to make some money from one day actions. Thanks Option. Happy Holidays to you and your family. My prayers for your father so that he may continue to get stronger every day. God Bless

  • Avatar OptionPundit says:

    Thank you for best wishes Sebby. My father is feeling much better and recovering from the stroke’s left over impact.

  • Avatar OptionPundit says:

    Amongst 7 companies that are being added, I have narrowed to only FFIV, AKAM and NFLX; as IVs between Jan/Feb is highly skewed, I would prefer to build strategies that are not going to be impacted much by IV. Thus either OOM butterfly or Vertical spreads are the preferred choice for the 3.

  • Avatar prakashsi says:

    op, don’t u feel that FFIV and NFLX are already priced in as they did excellent in past 12 months

  • Avatar Kim says:

    OP, would you go with Jan options? 185/190 for NFLX for example?

  • Avatar OptionPundit says:

    @Prakashsi
    The Announcement was on Dec 10, so I am not sure if it is already priced it. What might be priced is the move from Dec 10th (e.g. WFMI, DLTR); all said and done, pls don’t expect a major rally though.

    @Kim
    Yes, I shall prefer Jan options. Keep it to only a fraction of your capital. Even though these might be poised for up leg, overall market sentiments may also weigh. VIX is almost 52wk low and markets are overbought.

  • Avatar OptionPundit says:

    I opened bullish spreads on all 3 NFLX, FFIV and AKAM. I also opened a bullish OOM calendar @140 on FFIV (in addition to vertical) just to experiment.

  • Avatar Kim says:

    Right now all additions except WFMI are negative and ALL sevel deletions are positive.

  • Avatar OptionPundit says:

    @Kim,

    As interesting as it gets 🙂 there is no other explanation that comes to my mind except “contrary”. But that’s ok, part-n-parcel of trading.

  • Avatar Kim says:

    So what is your plan? Do you cut the losses on NFLX, FFIV and AKAM or give it more time?

  • Avatar OptionPundit says:

    I shall wait at least till 2nd POMO concludes at 2pm; if market reverses direction I shall keep these, but if not the just get out and book whatever loss and move on.

  • Avatar Kim says:

    OP, are you still holding? The market looks good today.

  • Avatar OptionPundit says:

    @Kim, Yes as market reversed direction post 2nd POMO y’day. But see Kim, pls don’t count too much on daily movements. I doubt if the market is really driven by investors currently. It might just be robo trading, there pls choose whatever exit rules you would like to set-up for the positions. As such when there is too much intelligence in the system, it doesn’t work that effectively 🙂

  • Avatar OptionPundit says:

    Pls book your profits on $NFLX trade

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