After watching how many sectors seem to have all of their components move in lockstep with one another, pushing the sector as a whole upward—or downward, depending on the day—it is helpful for options traders to understand how to take advantage of this movement within their own trading. Unlike the stock market, you cannot typically access any sort of ETF designed to gauge a sector’s overall health through a options broker.
If you wanted to trade, say, the technology sector as an option, you would be unable to do so precisely. Instead, you would need to either focus on one or more companies within that sector. While no brokers will allow you to trade a basket fund of tech stocks, almost all include the big names like Apple, Google, Microsoft, and sometimes even smaller companies, like Qualcomm. If you want to trade within this sector, but giving yourself an approximate representation of the sector as a whole, what should you do?
First, you need to look at the sector itself. Look at the fundamental data and the news. Why is it trending in a particular way? If it’s only noon and the sector is up 1.5 percent for the day already, why is this occurring? Pinpoint this piece of information before you do anything else.
Next, determine whether or not that trend is likely to keep going in the same direction. If not, then there’s no point in trying to trade the sector. You will find that it is far more effective to simply select an asset or two and resume your normal trading strategy of sticking to specific technical analysis methods.
But if you find that the trend is likely to keep going, then you need a game plan. Identify the trend, and then in each of the assets that you have decided are influenced by the mass movement, find relative weak points against the trend. So, if the tech sector is on pace to rise by 2 percent by the closing bell, and you see that Google just dropped by $1, then taking out a call option as it bounces back up will be helpful and give you some extra wiggle room.
When determining expiries, it is important to look at the data that you have available to you. If the data says prices will rise until the end of the day, then these trades are best. However, this won’t always be the case, so choose timeframes carefully.
Don’t forget that in many instances, you can incorporate other asset types into your trades. If you are trading the tech sector, you can sometimes add the NASDAQ index in with your trades as this index is comprised of mainly tech stocks. If you are trading energy stocks like Exxon and Chevron, then it is often appropriate to add crude oil into the mix with your trades. Being well researched in how different assets move in relation to each other is very important. Not only will it help you to increase your profitability across the board, but it will also help you to reduce the likelihood of making costly mistakes when you consolidate your trading into several different open options positions at once, all based off of how a sector is acting and the analysis into the future.
As a final word of warning, it is rarely ever smart to try and extend this type of strategy past the end of a trading day. If the same event or piece of data is still influencing prices the next day, great. You can start all over again. But trying to use this type of strategy past the end of a trading day is almost always a bad idea.