Our trading philosophy has multiple components including diversification and efficiency and that is our focus here with a look at index products, their correlations and why we might diversify even when the correlation is very high.
The efficiency of a product and its correlation to other products are two things you should be cognizant of when trading an index. An example of the products to choose from using the S&P 500, Nasdaq 100 and the VIX were displayed. The example included the index (cash), the ETN/ETF and the future for each index.
A table of the index products was displayed. The table included the leverage and at-the-money (ATM) put slippage of the SPX, SPY (S&P 500 ETF) and the /ES (1 contract). Another table comparing the correlation of the SPY, QQQ,DIA and IWM was displayed. The table showed that adding other indexes does not increase underlying diversification because most of the indexes have a high correlation.
An example of a short SPY put spread and adding a short QQQ put spread was displayed. The example showed the individual position risk and the total index risk on both spreads. In this example we overlapped our risk due to the high correlation between the SPY and the QQQ. Tom and Tony though reveal a strategy advantage provided by using a different product.
Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the takeaways and other important information on index diversification, correlation and efficiency.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.