Monday, January 22, 2007

QID – PSQ – QQQQ

As I forecast in Friday’s wrap I thought that today would be down and the rest of the week would be OK. Obviously we are being hit by earnings but the other factor – nothing to buy – is contributing as well. Consequently everything is being sold off hard so that there would be something to buy later in the week. I’ll do some pivot point examples later today but for now I’d like to show those of you who didn’t know how the Proshares QID and PSQ act with the QQQQ. Here is a picture rendered in my spectacular method for making quick and easy comparisons – Marlyn’s curve.



As you can see the PSQ reflects the Q’s almost move for move while the QID exaggerates the Q’s moves. That is because the PSQ is a 1 for 1 short vehicle while the QID is a 2 for 1 short vehicle. This can work to your advantage. As shown on the chart if you believe the Q’s are going down and you have a method such as Marlyn’s bands to guide you in your decision you can buy the PSQ to play instead of the Q’s. But why, you ask, should I use the PSQ when I could use the QID and get twice the results? Safety, I answer – the QID is far more volatile than the PSQ and even though you go up 2x as fast you also go down 2x as fast.

So when should I use the QID? On days like today when you are not sure from the outset which way the market is going to go.

Let’s say you buy 1000 shares of Q and 500 shares of QID at the opening bell. And you put a stop below both your trades – let’s say 15 cents on the Q and 30 cents on the QID. Within a few moments of market open your trade on the Q’s would have stopped out and your trade on QID would be mean and green. That would be one way to use QID. In this example QID went up $1.75 by 11 A.M. when it started flattening out and falling back so let’s say you close your trade at a buck 60. That’s 1.60 x 500 shares = $800 minus the $150 you lost on the Q’s gives you $650 profit less round trip commissions – make it $600. You didn’t have to do anything but sit and watch for an exit on the QID. Which was pretty obvious – take a look.



Out too soon? Maybe - but why be greedy.

Now of course you could have done this with share for share (I.e. bought a 1000 QID) but why bother when they are giving you some risk mitigation in the 2 to 1 short function.

This morning was a good morning to make this trade because the first few minutes were relatively benign – no big gap either direction – and because the direction was not as crisp as the futures and the pre-market exuberance would have you believe. Of course you can use QID in a gap up market but that’s a subject for another post.

The way I keep these two in my mind – I say the “D” in QID stands for double.

Oh - this is one very dangerous way to play the market - if you think you would like to try it start out small and work your way up.

3 comments:

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QUALITY STOCKS UNDER 5 DOLLARS said...

Lots of qs alright.