Never bought or sold options before in my life. I am thinking about a QQQ option to help hedge myself in case of a market melt-down. From all I can tell: One QQQ option contract (call/put) is an option to buy or sell 100 shares of QQQ (NOT $100 worth of QQQ, but 100 shares). So if I buy (just making up numbers here) a January 2022 QQQ put with a strike of 300 that would let me sell 100 shares of QQQ for 300 at any time before the expiration of the put sometime towards the end of January, 2022. So if the market tanks to 280, I make 20 * 100 = 20,000, less what I paid for the option (and I will pay the listed price * 100 to buy the option). Let's say I have $38,000 total of random stocks. Let's assume that I think they will move exactly like the QQQ, and let's assume that this is 100% accurate (of course it can't be, but let's assume). Since QQQ is currently at $379.95, I would buy 1 QQQ put, and that would equate to $37,995 worth of QQQ, so would just be $5 off from covering my $38,000 beyond the strike price at 300, roughly ~21% down. So (making those assumptions) I would be roughly protected against more than a 21% drop. Do I have that more/less right? It is weird, I googled a tons of things trying to figure this out, like QQQ specifications sheet and what not, but could not find anything. Any idea where is the white paper or whatever that gives the exact specifications on the contract? I relied mostly on what I saw other people saying haha.
What is really going to bake your noodle is that the QQQ is simply an ETF of the NDX100, of which really cannot be traded. But you can trade the NQ which is a future based in the NDX. And yet even still, you can trade FOP on the NQ! Crazy shit man! You have more research to do. Here's some music for it. Study well.
20 * 100 is 2,000, not 20,000. And the cost of that option is about 3.60, so you'd make about $1640... on a drop of roughly 1/4 of the price of the underlying, or a 100-point down move. Just for comparison, you'd make the same amount on a 10-point down move by buying 3x 370/380 put spreads at 3.50 apiece for the same tenor. Perhaps thinking about which move is more likely - i.e., how many times has QQQ dropped 100 points vs 10 points - would be a useful exercise? For one thing, you're missing the time element: options expire, while stock does not. And since you're trying to guess when this crash is supposed to happen, you're presumably buying this protection on a regular basis (or possibly on a long tenor.) This cost is likely to be quite high; for example, the 380 QQQ strike for 30th of June 2022, 302 days out, is currently running about $30/share. That is, the cost of "protecting" 100 shares for 302 days will be approximately $3,000 - which will increase your cost basis for what you currently own by that amount, and will also decrease your break-even - that is, the price at which owning that put will begin to pay off - by $30/share, meaning that the market will have to drop at least that much for you to make even a penny from this "protection". Oh, and it also means that you'll lose money on that option if your stocks rally. That's what a hedge does; it neutralizes your position. I hope that's not a surprise to you... But the market prices options based on all the factors including the possibility of a crash - so by buying that insurance, you're betting on being smarter (i.e., being sure that the option is underpriced) than the rest of the market. I'm going to tell you that this is very, very unlikely to be true. Another thing you're missing is that options do not move in perfect parallel (or inverse) with the price of the underlying stock; in fact, volatility and premium are so closely connected that option trading is often referred to as "trading volatility" - and vol is closely connected to time. So, if you've bought a put for, say, a year out, and the Qs do crash this coming week, the effect on the option you're holding may be significant... or it might buy you most of a burger at McDonalds. And staring at that tiny P&L, while your broker is calling you to tell you that your margin is being called - something that happens when markets crash - and that your stocks will be sold off from under you if you can't meet that requirement, is not likely to tickle your jollies. So, no. It's not that trivially simple, there's no free money (or too-cheap protection) on the table, and jumping into options believing that there is makes for a pretty good route to an empty wallet.
Going to cash is the worst advice. You won't get back in. if you happen to be wrong. you will miss further up moves. Nothing wrong with hedging and losing money on the options. It is called insurance. Think of it as an insurance premium. e.g. similar to fire or flood nsurance etc.
No true degenerate would ever be caught with anything that sane and stable in his port. Take out a loan against your college fund and YOLO every last penny into .01-delta AMC calls!
Do yourself a favor and look into selling covered calls against your QQQ long position as a first step into options. Also, don't fall in love with your ETF long position, as it's a means to an end, which is yearly return. It's common to be in and out of markets on a regular basis .