Getting Over Trader’s Block
Apr 21, 2021
At the time of writing (9am CT 4/15), all Small Exchange futures are well within their weekly range as forecasted by volatility. Most markets are safely between year-to-date extremes, and the VIX index is at its lowest level since news of the pandemic initially felled equities back in February 2020.
With all of that said, last week was one of the year’s best for active futures traders.
If you’ve been exclusively looking at the outright markets, then you’ve most likely been met with sideways, frustrating trades. However, amid that sideways action, relationships among the outrights continue to twist and turn. Trading the difference between two markets has in some cases yielded more opportunity than the individual markets themselves.
The relationship between two correlated markets can be viewed as a rubber band. Their difference expands and contracts with some regularity relative to how strong the band is. Very highly correlated relationships, like Small Technology to Nasdaq, only deviate slightly, while the weaker ones, like Small Technology to Small 10YR Yield, witness greater divergences.
Small Technology \ Relationship Standard Deviations
Source: dxFeed Index Services (https://indexit.dxfeed.com)
One way you could access these relationship trades would be by buying the underperformer and selling the outperformer, if you think the rubber band will hold. But the band does break every once in a while, so realistic expectations and firm mechanics could prove helpful.
Finding inspiration in low volatility can seem tough, but seemingly sideways markets can lead to some of the best opportunities for active traders.
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For more information on the Small Exchange’s products and subscription service, visit smallexchange.com. And be sure to check out my new show on tastytrade, Small Stakes, where Pete Mulmat and I will show viewers how to navigate Small Exchange products every Monday-Friday and always on demand.
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