tastytrade logo

Market Awareness Definition - What is Market Awareness?

Overview

Market awareness refers to our ability to assess the entire stock and option marketplace from a macro level. Having a better market awareness allows us to avoid poor decisions and optimize our good ones. We like to break market awareness down in three levels: Sector awareness, fear awareness & participant awareness.

Sector Awareness

From the highest level, we want to have a good understanding of the different futures and where they’re at from an overall market perspective. We generally pay attention to /ES (S&P 500), /NQ (NASDAQ) and /YM (DOW JONES) for our equity overview. They have a high positive correlation, meaning they generally move in the same direction. From there, we can look at different commodities such as /CL (OIL), /NG (NATURAL GAS), /GC (GOLD), as well as interest rate futures and currencies.

It’s a best practice to keep an eye on the activity of these futures, as they bucketize a vast majority of the underlyings we will actually trade.

Fear Awareness

Once we have a grasp on the overall sectors and their activity, we dive a little further into the sentiment of the market. We use /VX (FUTURE) and the VIX (CASH INDEX) as our fear gauges. Both of these instruments measure the implied volatility of the S&P 500. This is important because implied volatility is not only an indication of implied movement, but it is also a gauge of option prices. When implied volatility is high, that means option prices are on the higher end of their spectrum. When implied volatility is low, that means option prices are on the lower end of their spectrum.

We generally like to sell premium when IV is high, and buy premium when IV is low. Keeping an eye on /VX & VIX prevents us from buying premium in high IV environments.

Participant Awareness

The third layer of market awareness has to do with the participants in the market. This is also known as liquidity. It’s important to have a gauge on overall market activity, because low activity levels are suboptimal. For a quick gauge, we can look at shares/contracts traded in SPY or /ES. Most of the market uses these instruments as their benchmark, so it makes sense that they’re some of the most liquid underlyings out there. Low volume in the stock and option market can create situations that are less than ideal. Wider bid/ask spreads, and the inability to get in and out of trades quickly are just two of the downfalls of illiquid markets. Additionally, when liquidity is low, we can see pretty quick and drastic moves to the upside or downside. This is due to a lack of resistance from the opposing side. If a big player steps in, there’s not a lot of resistance to keep the price from shooting up or down. For these reasons, liquidity is king!

Having an overall understanding of the market is a great first step to developing a portfolio and making more sound decisions. There are a lot of moving parts in the market, but if we focus on these three main macro aspects we can see things more clearly.

Supplemental Content

Episodes on Market Awareness

No episodes available at this time. Check back later!

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.