Tech Stocks Booming – Buying them through XLK options

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Looks like Technology stocks are back in vogue, after rallying nicely over the last two days. I think the “long commodities/short dollar” trade, which has been the primary trade for the past three months is clearly reaching the end of its profit potential. This trade relied on the falling dollar to make money as commodities are priced in US dollars. With the economy looking like it may have reached a bottom and interest rate cuts at historic lows traders are starting to get back into growth stocks – and the technology sector has the best growth stocks.

Seeing as I am no technology stock picking expert and have limited funds (Budget = $2000) I have decided to play this trend by buying the Technology Select Sector SPDR (XLK). This exchange traded fund (ETF) typically invests at least 95% of assets in companies of the technology sector and per the screen shot here it contains most of the leading stocks in this sector (I already own some Google stock). So I think it is an efficient and safe way to play this trend – my upside may be limited by the diversification in the ETF, but down side is also limited by the same premise. My only decision is to decide whether to buy the actual ETF or to buy the underlying call options which will allow me to use the power of leveraging (1 option contract gives me exposure to 100 shares) to maximize my returns. However if the ETF stock price does not rise above the call option strike price (plus the cost of the option) I lose my entire investment.

I have got this trade on my watch list and will look to buy in the next few days. Let me know your thoughts on this investment.

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[…] for a broad based, diversified ETF or low cost mutual fund that tracks an index or sector (eg QQQQ, XLK for Nasdaq or XLF for financials). Also ensure you get the lowest cost broker (Zecco is one I […]

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