Options Jive

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Movement in Indices vs. Single Stocks

Options Jive

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Here at tastytrade, we trade options on as many products as we can get our hands on: indices, ETFs, futures, single stocks, you name it. However, when preparing to put on a trade in, say, a single stock, it is important for us to grasp how that underlying tends to move. Today, Tom and Tony look to illuminate the difference between trading a single stock versus an ETF.

The conversation starts with implied volatility (IV), since we are primarily sellers of high implied volatility owing to expensive options on an underlying. Though an underlying’s implied volatility number is important, it is more beneficial to compare that current IV to historical IVs in that same product to see if it is high or low. We do this via the IV Rank metric. Single stocks can be tricky in this sense, as they tend to show higher IV than an ETF does because the stock has specific risk dealing with earnings, news, and all the rest that goes along with being a single company. ETFs will tend to have lower IVs due to their diversity of stocks making up the underlying. This has caused ETFs to experience fewer moves in price of 2 or 3 standard deviations historically.

Though we make sure to look for all of these things, we still believe that the market is priced efficiently and thus trade high IV Rank even in the larger moving single stocks.

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