Sunday, October 22nd, 2017

Index options trading- advantages


Index options trading is focused on major indexes wholly and not on individual stocks. The same principles can be applied to stock trading but often with different results. Indexes are an aggregate sum of stocks and move with the general trends prevailing in the markets, depending on the economy, oil, wars, and world events.

1. Indexes do not have earnings surprises- meaning you will not experience the kind of volatility associated with individual stocks. The volatility levels of indexes are between 25%- 35% and that makes them an ideal platform to initiate income generation trades. With a stable volatility environment, index movements are much more predictable, and slower.

2.Indexes do not have news which often moves stocks up and down. An XYZ company’s CEO jumps bail and disappears in Brazil with company funds and the stock drops 20 points. This kind of noise is completely taken out with major indexes. Fewer events and lesser noise, and a stable trading platform.

3. There is a level of safety and security in indexes. A company can go out of business, taking all your investment with it, but an index can’t. A company stock can go down to almost zero, but an index will not do that.

4. Indexes have multitudes of strikes available for a income trader. SPX , NDX, RUT, IWM have strikes going up and down for pages to scroll. This makes adjustment and selection of trades far more easier than stocks. Only stocks above $100 have can have those kind of comparable strikes to contend with.

5. Major indexes provide ample premiums at strikes far out one or almost two standard deviations away, and hence are very attractive to professional and institutional traders.

6. Some indexes trade in pennies , hence they are very liquid. IWM, SPY have penny increments which major stocks do not have and some stocks only trade in 0.05 cent increment. Though few stock were tested to be traded in pennies last year yet no such trend is visible. This makes for great executions and liquidity and keeps losses to a minimum.

I recommend paper trading at first, to get used to index trading if you have not done so. This is the best way to learn the behavior of indexes and how the markets move. Paper trading can be accomplished at www.cboe.com with a virtual account. Please visit and start paper trading your trades first. Options do involve risk of capital and losses can be real.

Educational material is available here along with many other trading tid bits, so one can learn and make money and a have a consistent income month over month in bear or bull markets alike.

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Comments

5 Responses to “Index options trading- advantages”
  1. Index options can be very profitable but also very volatile. Getting the best entry prices is really what people need to do to protect themselves from the volatility.

  2. Index options are a great way to diversify for many people. Unfortunately, with the light volume in August we see a great deal of volatility and that can make it very difficult for people to stomache.

  3. alliance says:

    Yes that is obvious. Volatility can rise during summer months. Last August it was very high during the same time periods and its was very difficult to trade.

  4. Amy says:

    It’s a good idea to practice it on paper first. Even with investing in indexes, it’s recommended to set a sell price and stick with it. Don’t ride the market down on the expectation of a “rebound soon”.

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