Most of the time when I’m trading it’s either stocks or options.
However, there are a few situations where I trade ETFs I want to go over.
*See disclaimer below
In fact, it’s the one time I find them invaluable:
Betting Against The Market.
More specifically, I’ve incredible opportunities trading puts on the SPY and QQQs. I’m not lying when I say they are among the most profitable trades I’ve had this year.
That said, I want to show you the setup which has given me the most success.
Let me start by giving you my criteria for ETFs.
Similar to stocks, I want the ETFs to be liquid with weekly options.
Major index and sector ETFs work for this like the SPY, QQQ, IWM, DIA, XLF, etc.
Not all ETFs have options. So before you assume that it does (many leveraged ones don’t), double-check the option chain.
So why do I use an ETF for market declines instead of a stock?
When I analyze market behavior, I’m using internal health indicators like the NYSE Tick chart, the NYSE advance-decline, the VIX, etc.
These all help me understand the market, not necessarily a specific stock.
So, if I review all these puzzle pieces and determine the market is about to roll over, why would I trade a different chart?
Yes, some stocks like Apple may trade closely with the SPY or QQQ. But, they aren’t the same chart.
This brings me to the following point – I trade what I’m analyzing.
If I find a TPS setup on Facebook, then I’m trading Facebook, not Apple.
ETFs and market declines
Now, there’s something you probably didn’t know about ETFs I’m about to share.
In general, major market ETFs like the SPY and QQQ have what’s known as a skew.
In this case, it means the puts are more expensive relative to the calls.
Here’s a quick example.
Take a look at the following option chain on the QQQ.
At the top left, you can see the price of the QQQ is $275.
The price for the $275 put option is $6.89 while the call option is $6.83.
Not a huge difference.
But you’ll see it get wider as you go further out-of-the-money.
That’s because investors and traders often use major market ETFs to hedge their stock holdings.
And the first thing that everyone clamors for when stocks start to slide – ETF puts.
There are a few other benefits of ETFs that I should mention.
The first is specific to the SPY which follows the S&P 500. Not only does it have weekly expirations on Fridays, but it has ones for Mondays and Wednesdays as well!
Since market downturns often come out of nowhere or might be short-lived, these work great as day trading instruments for me.
Now, while not actually an ETF, many of the major market indexes also have options on the index itself.
For example, you can buy calls and puts directly on the S&P 500. There’s also a mini S&P 500 index that closely matches the SPY.
What’s cool about these is they are cash-settled. That means if I let them run to expiration there is no assignment risk.
Brokers just take your wins or losses and credit them to your account.
And let me tell you something – with strategies like butterflies that are extraordinarily difficult to close out, this can be a huge benefit.
Using them as a hedge
Sometimes I find myself in a difficult situation – My trade setups remain valid, yet I see the market about to rollover.
Or I have far too many bullish positions on.
Those are the few times where I use puts on the major market indexes as a hedge, similar to investors.
As I noted at the beginning of the newsletter, on Friday, I held many long positions while I traded a smaller setup in the QQQ for some quick profits.
The puts on the QQQ hedged my long positions, allowing me to profit from both directions in the market that day.
Timing is everything
I hate to say it, but one of the reasons my LottoX works well for me is timing.
Using my LottoX indicator, I’m able to narrow down my entries to right before I expect explosive moves.
And with options trading, that’s critical to success.
Do yourself a favor and see what LottoX is all about.