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Best Practices

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Trading ETFs

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment focuses on Exchange Traded Funds (ETFs) and specifically, why we trade them and their inherent advantages as well as disadvantages. This segment will have you looking at ETFs in a new way and with greater market knowledge.

ETFs are mutual funds that trade like stocks. They can be bought and sold on the different exchanges throughout the day. They usually track an index, commodity, or a basket of assets. ETFs will closely track the returns of the index or commodity they represent.

ETFs have advantages and disadvantages. One important advantage is the lower specific risk as compared to an individual stock. An individual stock is subject to news events such as a merger, worker unrest, accounting problem etc. that aren’t applicable to an ETF. An individual stock in the energy sector may have news that is bullish or bearish while it has almost no impact on other stocks in the sector. ETFS also provide diversification through their very nature. The SPY ETF tracks the S&P 500 index and is thus made up of 500 stocks.

ETFs also have advantages for smaller or less risk tolerant traders as compared to futures contracts. A table displayed several ETFs and their equivalent futures contract. As an example, 1 /es is equal to 500 shares of SPY. By trading just 100 shares of SPY it is the equivalent of ⅕ of the /es. This can be taken even lower by using options. .

A table was displayed of the XLE (Energy Select ETF) and its larger components including EOG, KMI, OXY, CVX, SLB and XOM. This showed how the individual components usually have a higher implied volatility (IV) to to a higher perceived risk.

There are also leveraged ETFs. A leveraged ETF is designed to track an index, commodity etc. and produce a specific multiple of the daily move (almost always twice or three times). That means if the SPY goes up 1% in a day the SSO 2x ETF should move up 2%. A graph illustrated this.

Some ETFs are tastytrade favorites. A table displayed examples of some of these ETFs. The table showed the symbols and whether the options liquidity was high, medium or low.

Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the takeaways and to learn more about ETFs. The knowledge gained here can help your trading.

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