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Today’s options video blog is a reply to the question: Do you trade index options? If not, why not?
index options, options video
Yes, you are being nitpicky. A number of other reasonable questions could be phrased the same way – do you hold your posititions to the last week, if not why not? Do you trade weeklies, if not why not? Those things have probably been discussed in this blog in the past. However I think you answered the question in your discussion of SPX which I think is a lousy instrument to trade. RUT is somewhat better but SPY and IWM are far better choices for most individual investors.
Agree with the nit-picky. Thanks for helping me see the light.
I want to hear from you as to why you feel RUT is better than IWM for most investors. Just curious, not necessarily disagreeing.
sorry the other way: why do you think IWM is a far better choice than RUT. Got it in reverse.
I’ll give you my opinion, but keep in mind that it’s just one opinion, I don’t claim to be an expert and certainly don’t have as much experience trading options as Mark – so take it for what it’s worth.
I have traded SPX, SPY, RUT, and IWM. I would really like to be able to utilize SPX and RUT because I usually trade in size where I would save in commissions with those products and in every case I would benefit from the 60/40 tax treatment. Nevertheless, I find that the much tighter spreads in SPY and IWM outweigh the aforementioned benefits of the index options. This is especially true when you want to exit a position quickly – with SPY and IWM the spreads are often a penny wide, so even if you trade at the natural it may be only a penny or two away from the mid. In my experience that is almost never the case with SPX or RUT – and that is after accounting for the fact that they are 10x the size.
So basically I never trade SPX, and I only trade RUT once in awhile – usually if I am able to fill an order to sell a credit spread at a fair price. It happens sometimes, but more often I will just fill the equivalent order in IWM and trade that instead.
Experience is the best teacher and if you have the trade executions to show that the ETFs are better vehicles, then there is not much to say. I take your post as being very worthwhile.
Are you using a US broker?
For me, 10 IWM IC requires trading 36 extra contracts (40 vs. 4) to open, and another 36 to close. That’s at least $0.70 * 72, or > $50. And more when I have to pay exchange fees (which I do).
I’d like to believe that I can get filled by sacrificing <$50 for both the open and close.
1) Assume you find the IWM IC market to be $0.29 to $0.31, and get filled at $0.30.
2) Assume I find the RUT market to be $2.50 to $3.50 – and that's pretty wide. Midpoint is $3.00.
If I can buy @ $3.20 – then I am only giving up $20 for each one-lot
Doing the same when exiting costs another $20.
Isn't that better than paying $50 in commissions?
Or do you have some very low rate?
Thanks for the information
You make some good points and I don’t completely disagree with you which is why I still attempt to trade RUT (SPX is a different matter, I have given up on that). The main problem I have with RUT is trying to figure out where you can execute the trade. In your example you fill at $3.20, I have done that too but particularly when the market is moving and you want to get out quickly, price discovery in RUT seems much more difficult to me than price discovery in IWM where I usually fill at the mid or a penny above the mid. While I don’t have your vast experience, I am not a novice either so I presume that the majority of individual investors would also find the price discovery in IWM much more straightforward than RUT.
I am using a U.S. broker with a low rate – $9 plus 15cents/contract. 50 verticals would cost $24 ($9 plus 100 contracts) – so it costs $48 to put a condor on, another $48 to take it off – $96 total
5 verticals on RUT would be $9.75, so $39 total. (I haven’t traded an index in this account so there may be some additional minor exchange fees, but these numbers are probably pretty close).
So there is still a commission savings with RUT and much better tax treatment which is why I haven’t given up on RUT, I will probably get better at trading it over time as I learn a little each time my orders fill or don’t fill.
In case anyone is wondering about the commissions, I am getting no special deal, and I am not promoting any broker. It is an advertised rate at a regular brokerage, Mark has done webinars on their site in the past so it’s not that hard to find if anyone is interested.
I agree that price discovery is far more difficult, and it’s also a point I neglect to consider. You just never know how much to bid or offer. But the far more important point that you raise is the need to trade in a hurry. IWM allows that much more efficiently than RUT.
If someone trades RUT, it’s acceptable to adjust with IWM when a sense of urgency is felt. It’s not 100% correlation, but it’s close enough. It comes down to a matter of personal choice.
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