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Getting Small with Sector ETFs

tasty BITES

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

Tom begins the segment with a conversation about the importance of young traders getting their feet wet in the options world even if they have a smaller account. Moving on to the research, the guys show how small-account traders can gain short premium exposure in equities without sacrificing multiple thousands of dollars in buying power requirement (BPR), which is usually the case in the liquid underlyings like SPY and IWM that we like to trade.

Sector ETFs like XLK and XRT, technology and retail stocks, allow for traders with smaller accounts to get in the game without putting up a considerable portion of their account in BPR. This is because most of these ETFs have smaller prices, and thus have smaller margin requirements. The sector ETFs that Tom presents here combine both great liquidity and diversification so that traders can pick and choose where they think short premium opportunity might lie, dependent on which has the highest IV Rank.

Finally, historical results are shown for short straddles in the sector ETFs that the team has used as examples for this segment. History dictates that implied volatility also overstates in these sector ETFs as well as the market indices like SPY and IWM.

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