Trading Options  |  SEP 2006

Playing The Index Market by Tom Gentile

Stocks & Commodities V. 24:9 (68-71): Playing The Index Market by Tom Gentile Sometimes, it helps to look beyond the market averages and at specific sectors or industry groups instead. Quiet and trendless markets often leave index traders sidelined. Without volatility, trading indexes become more challenging because often-used strategies like bull call spreads or straddles simply don’t work. These types of strategies require vertical movement. Unfortunately, falling volatility and sideways trading have become more frequent in the current market environment. Fortunately, ways to generate profits can still be found even when the overall market moves sideways. One approach is to use a variety of strategies. Not all option strategies require vertical price movement. In fact, some do better in low-volatility situations or horizontal markets. For example, butterflies or calendar spreads are strategies that do best when markets trade within a range and without significant movement. So when faced with a sideways market, index traders can turn to strategies that work well in those market types. Alternatively, when faced with a sideways market, rather than trading more familiar indexes like the Standard & Poor’s 500 ($SPX) or the NASDAQ 100 (QQQQ), traders can focus instead on the variety of sector index products. It is this approach that we will discuss. In order to find directional trades in the index market, sometimes it helps to look beyond the usual market averages and at specific sectors or industry groups. Fortunately, index providers have developed an array of new products to work with. Unfortunately, the list has grown to the point that many traders simply can’t make sense of all the different sector indexes and exchange traded funds available. Here’s some help for those traders.

by Tom Gentile