Weighting of Index Components

Know what you are trading. This is a basic rule ignored by many traders. The starting point for information on a specific product is the contract specifications published by each exchange. These specifications include: symbol, underlying product, multiplier, strike prices, expiration months, expiration date, exercise style, last trading date and settlement value. Knowledge of this information is required before you make your first trade. When trading indexes and ETF’s based on indexes you should know the components and component weighting of the product. This is found in the contract specifications for the underlying product of the options you are trading
The NASDAQ-100 is a stock market index of 100 of the largest non-financial companies listed on the NASDAQ. It is a modified market value-weighted index. This means the weighting assigned to each component company in the index is based on their market capitalizations. The index does not contain financial companies, and includes companies incorporated outside the United States.
The component weighting of Apple in the NDX makes the index difficult to trade at times. The top five weighted stocks under the NASDAQ 100's weighting structure: Apple 20.1%, Qualcomm 4.7%, Google 4.3%, Microsoft 4%, and Oracle 3.1%) comprise 36.1% of the index weight today. The effect of Apple’s 20.1% weighting in the NDX can be seen when comparing NDX performance to SPX performance for similar time periods.
The impact of component weighting must be considered when reviewing option strategies and index selection.