Why do you trade in Sector ETFs

ETF ETFs exchange traded fundsWhat is an ETF? An Exchange Traded Fund invests in the stocks and securities of a specific sector. Which fund is trades is typically identified in the fund title. Most sector ETFs focus on U.S.-based stocks, but several will invest globally in an attempt to capture the worldwide performance of the given sector.

Sector ETFs dissect the market according to their economy activity. These products are popular with investors looking for targeted exposure in addition to their core equity exposure, as well as those looking to take advantage of long-term trends in the economy.

Trade small

Traders can earn a lot of money with options. Especially when they sell options for premium. You can set up trades with defined risk strategies or with undefined strategies. Traders with small trading accounts can enter the most positions when choosing defined risk strategies. The reward is smaller though.

If they choose to enter undefined risk strategies like straddles they can enter less trades. The risk is much bigger, therefor the amount of money a broker reserves e.g. the buying power reduction is bigger. You want to enter as many positions you can. Therefore choose ETFs to stay small.

ETFs correlations

Furthermore, investors can benefit from the low correlations between each sector, which allows for easier risk management. From an active management perspective, they can also implement sector rotation strategies.

Today’s Options Jive looks at the sector ETFs. The list can be

seen below:

  • Energy (XLE)
  • Financials (XLF)
  • Health Care (XLV)
  • Utilities (XLU)
  • Industrials (XLI)
  • Technology (XLK)
  • Consumer Discertionary (XLY)
  • Consumer Staples (XLP)
  • Materials (XLB)
  • Retail (XRT)

The Retail ETF has the highest implied volatility, whereas the lowest is Consumer Staples. A correlation matrix is then shown for traders to examine the relationships between the ETFs.

Lastly, a table is shown demonstrating the high historical probabilities of success for those looking to place 1 standard deviation strangles.

For more information, please watch the show. tastytrade.com

 

 

 

 

 

 

 

 

 

 

 

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