So if you're all ready to actually start trading undefined risk strategies but you're wondering where you should start then we have your answer in this segment explaining why ETFs are perfect for beginners and small traders. Anyone trading a tastybite sized account should watch this segment and all will benefit from the information here.
Traders have many choices as to where to invest their trading capital. There are individual equities, futures and ETFs. Each underlying has a different risk profile. Some say you should trade what you know. The tastytrade approach is somewhat different.
Tom and Tony listed the parameters that are most important: liquidity, recent implied volatility (IV) movements, recent price action (extremes) and potential market-moving catalysts. They also discussed each.
While individual equities generally trade at higher implied volatilities (IVs) according to our studies that does not mean they are the best for a beginning trader. The most liquid ETFs trade with lower IVs than individual stocks (as was shown graphically) but they also tend to have overstated volatility as compared to individual equities. A table comparing individual stocks to ETFs was displayed. The table included the percentages that both stayed within their expected move and the percentage that both went outside their expected move.
Individual equities carry more risk. They have company specific risks (mergers/acquisitions, dividends, etc.). A second table comparing individual stocks to ETFs was displayed. The table compared individual stocks and ETFs for less than 1 standard deviation moves, 1 to 2 standard deviation moves, 2 to 3 standard deviation moves, 3 plus standard deviation moves and the largest standard deviation moves.
A graph of the standard deviation moves of individual stocks and ETFs was displayed. The graph showed that by sticking to ETFs it can help you avoid “blow-out” type moves.
Watch this segment of “tasty BITES” with Tom Sosnoff and Tony Battista for the takeaways and the data to help you decide what type of underlyings to choose when beginning to trade undefined risk strategies.