The Moderating Effect of ETFs and Associated Options on Financial Markets
With the proliferation of ETFs and options associated with them, I am speculating (!) that it will be harder to beat the markets from now on. Why?
You see, before ETF and their options began to trade on the markets, if you have a portfolio of 20 stocks, and your outlook for the next few months was that the market would trade sideways, you would have to sell calls on a bunch of your stock to take advantage of your thesis (collect premiums). If your portfolio was well correlated with a major index, you could sell naked calls on the index, but many individual investors are wary of such ideas-plus your correlation thesis might not work out (correlations have an amazing tendency to break apart in market gyrations) and you might end up with a double whammy loss. Many portfolio managers aren't even allowed to trade options. Selling options on a bunch of stocks is very expensive-options trading costs are nowhere near as low as stocks trading. Plus the spreads will kill you on your illiquid options.
Enter ETFs. Many a individual investor are using these to get into markets. You buy an ETF like GDX or OIH, and sell call options on it. Averaging down on ETFs is easier also-low trading costs. An ETF is unlikely to disappear, and averaging down with call selling is I think going to gain momentum as a great way to make money. Of course, you have to watch out for an occasional sector going bankrupt (Airlines are an example), but if you don't tilt too heavily to one sector, you can think of this as a good strategy to trade the markets. The effect on the market? Overall dampening of the gyrations, reduced volatility, and lesser opportunities for "Trading" (remember that volatility is a must for traders). Think of options selling on ETFs as a dampening factor on the stock price oscillator.
Who loses? The ones who trade options on individual stocks (high commissions), the options buyers, the buy and hold stock types. ETF options selling will eventually bring market volatility down-and it will be ever harder to beat the major indices if everyone indulges in this practice.
I myself am following these words by averaging down on OIH and GDX and selling 6 month out call options on them.
Sanjay John G.
You see, before ETF and their options began to trade on the markets, if you have a portfolio of 20 stocks, and your outlook for the next few months was that the market would trade sideways, you would have to sell calls on a bunch of your stock to take advantage of your thesis (collect premiums). If your portfolio was well correlated with a major index, you could sell naked calls on the index, but many individual investors are wary of such ideas-plus your correlation thesis might not work out (correlations have an amazing tendency to break apart in market gyrations) and you might end up with a double whammy loss. Many portfolio managers aren't even allowed to trade options. Selling options on a bunch of stocks is very expensive-options trading costs are nowhere near as low as stocks trading. Plus the spreads will kill you on your illiquid options.
Enter ETFs. Many a individual investor are using these to get into markets. You buy an ETF like GDX or OIH, and sell call options on it. Averaging down on ETFs is easier also-low trading costs. An ETF is unlikely to disappear, and averaging down with call selling is I think going to gain momentum as a great way to make money. Of course, you have to watch out for an occasional sector going bankrupt (Airlines are an example), but if you don't tilt too heavily to one sector, you can think of this as a good strategy to trade the markets. The effect on the market? Overall dampening of the gyrations, reduced volatility, and lesser opportunities for "Trading" (remember that volatility is a must for traders). Think of options selling on ETFs as a dampening factor on the stock price oscillator.
Who loses? The ones who trade options on individual stocks (high commissions), the options buyers, the buy and hold stock types. ETF options selling will eventually bring market volatility down-and it will be ever harder to beat the major indices if everyone indulges in this practice.
I myself am following these words by averaging down on OIH and GDX and selling 6 month out call options on them.
Sanjay John G.
0 Comments:
Post a Comment
Links to this post:
Create a Link
<< Home