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Last week I gave a presentation titled, “My Gameplan for the Year Ahead – Earn $1,200 a Month”. The webinar has had such an overwhelming response that I’ve decided to focus the next few weeks on the key elements of the strategies I use within the Options Advantage service.
The foundation for all of my options strategies is to create a watchlist of highly liquid, optionable ETFs and stocks.
Here’s the current list of the ETFs I trade minus a few exceptions.
The reason we only want to trade highly liquid, optionable ETFs and stocks is simple…we want price efficiency on our side. Options volume can vary dramatically between underlyings (ETFs or stocks). Just think about the volume difference between a stock like Apple (Nasdaq: AAPL) (our Apple portfolio is up over 41% since its inception, while the stock is down 15%) and, say, a small-cap stock like Sandstorm Gold (Nasdaq: SAND).
If the volume isn’t there you will have a very wide bid-ask spread…and a wide bid-ask spread leads to what’s known as slippage.
Let’s look at an example.
The SPDR S&P 500 ETF is one of the most heavily traded ETFs in existence. It’s also indicative of what I like to see in a bid-ask spread. As you can see below, at each strike for both the calls and puts the bid-ask spread is at most $0.03 wide. Ideally, that’s what we want to see.
The reason is because if you buy at the ask and sell at the bid (or vice versa) you only have to make up at most $0.03, or 1.5%, on a $2.00 option.
Let’s say that the bid-ask spread was $0.25 wide on that same $2.00 option. Even though I would suggest setting a limit price in between the bid-ask, you would still have to make up $0.125 or 6.25%…and that’s the best-case scenario.
In many cases the bid-ask spread is upwards of $0.50 or more. Just think if you started already down 25% on a trade due to the bid-ask spread. It doesn’t make sense, yet I can’t tell you how many traders fall into this trap especially when they are new to the game. It is pure nonsense, yet not that many so-called gurus discuss this essential step.
Again, everything I do within the Options Advantage service is based on creating a statistical advantage…and it begins with the watchlist of highly liquid, optionable ETFs and stocks. I haven’t included every ETF I trade in the list above, but it’s damn close.