When investing for retirement, or for trading short term equity price movement, a diverse group of equity holdings is always recommended. As seen by recent trading activity, an index makes a lot of sense. Imagine if you had your retirement funds invested in Apple, Google (Alphabet A) and Target; you wouldn’t be too happy with your performance. If however, you had chosen Amazon, Walmart and Facebook, you would be a lot more pleased. Unfortunately, people with stock picking skill are rare and investors are much better off investing in funds like SPY (SPDR S&P 500 Trust ETF) or Futures Contracts like the E-mini S&P 500.
The S&P 500 represents a broad base of Stocks and, unlike the technology based NASDAQ, is a better representation of the economy as a whole. The Table below shows the returns, not including dividends, of the Stocks and Indices described above. While returns of individual Stocks can vary widely, the Indices obviously average things out quite a bit. For those investing for the long-term, an ETF (Exchange Traded Fund) like SPY provides the opportunity invest with very low costs. In addition, because most investments are compared to the a Benchmark like the S&P 500, you will always do as well or as poorly as the S&P within a very minor cost of trading. This way there is no second guessing the performance of your money manager.
If you are trading for short term market gyrations, there is no better way than by using SPY or the larger, leveraged Futures Contract, the E-mini S&P. They provide liquid Options with a significant Implied Volatility Skew that enables you to develop Options Strategies that can meet your trading needs. Compared to other Options Contracts, you are unlikely to find one that provides all of these benefits. Keep in mind, Liquidity Counts and these Indices provide Liquidity that is only matched by perhaps AAPL.
The PowerPoint Presentation, available through this link provides information about why the SPY and the E-mini S&P are the perfect Options Trading Vehicles for those interested in benefiting from the movement of the market as a whole. It takes a look at Liquidity, Implied and Historical Volatility, the Skew and certain Strategies that can be used efficiently. If you are Trading Options and have moved beyond basic aspects of Options Trading like Calls, Puts, Straddles and Strangles and can price the in and out of the money Option Prices easily, you need to develop the skills to get you to the next level of Options Trading.
Whether you are investing for the long term, or trading for short term movement, be sure that you are a value trader. Analyzing an Options Bid/Ask differential when compared to the Delta of the Option can tell you how much the market will have to move to break even. If you aren’t calculating that before trading, Contact Us. For those with a long term horizon the SPY and E-mini Futures enable you to invest in Stocks with minimal expenses. In either case, the goal of every investor or trader should be finding the best value possible. Picking individual stocks is a difficult way to reach long term investment goals.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.