Why the Vol-of-Vol Ratio is a Superior Trading Signal

If you're new to option trading, looking at all this stuff, all the symbols and strike prices, expirations, all that stuff, all the news you hear, it can it can be a lot. And sometimes when there are so many choices, so many decisions to make, sometimes it's just easier not to make a decision at all, and you just sort of never really learn by doing. With option trading, you don't want to do that. You want to get in there and start trading and start learning and yeah, you're going to make some mistakes and hopefully you're going to make money, but you might have some losing trades, too. And that's how you're going to learn. But the question is, how do you start? What do you start with? Here are three symbols that I think you should start with. I've been trading for over 30 years and I've traded just about one of everything that's out there. But when it comes to new traders, there are three broadbased ETFs that I think are the best. So the first is SPY, the ETF that tracks the S&P 500. The second is the QQQ, the ETF that tracks the NASDAQ 100. And the third is IWM, the ETF that tracks the Russell 2000. Now, why ETFs? Well, the reason ETFs is for ETFs is that you can trade them in an equity account at a brokerage firm. You don't need a futures account uh or anything like that. You can trade these equity ETFs just as you would a regular stock. The second point is they're diversified. So you get the diversification of an index. um an individual stock. Yes, you could trade those, but sometimes whether you have a news event, earnings, something like that, that can send the stock up, you know, up or down more than you might expect and might be a little bit more volatile, a little too much excitement for you as a new trader, maybe. So, broad-based ETFs diversify that that that diversify that risk away. three points why I think these ETFs are the best place to start. The first is they're liquid. The options in them are liquid, meaning they have tight bid spreads. There's there's a lot of trading activity in them. Looking at the spy right now, looking at these options with 40 days to go, there three cents wide, two cents wide between the bid bid ask prices. That means you can get f you can get fills. You can execute trades close to fair value. Look at the trading volume. There's hundreds and thousands of these options being traded. That means you can get trades executed efficiently and quickly. Remember, don't get into a trade that you can't get out of. What does that mean? Well, if I if I'm bullish on SPY and I buy a call spread here, I can exit that trade if and when I want to. I don't have to, you know, work the order and hopefully somebody comes in and trades with me. In spy, I IWM QQQs, there's always somebody willing to trade. The second point is there are single points between strikes. So, look at this. In spy it's 767 to 768 to 769 Q's it's um you know 713 to 714 to 715 to 723 724 single points that's what I'm talking about IWM 290 291 301302 that means you can create option strategies with very low risk So, the difference the dollar difference between these single point strikes is $100. Now, I know you don't want to lose $100. Neither do I. But you do have to take risk in order to try and make money in these things. But the risk can be very, very small. So, for example, um if I buy um this 294 296 call vertical, um I'd pay a$1.14 for that for that vertical spread if I were bullish on IWM because there two points between strikes. It only costs a dollar4 which is $114. That means if IWM drops, I'd lose the m most I could lose is about $114. I don't want to lose that. But that's a pretty small risk considering the size of this index. If I wanted smaller risk than that, I could buy the 295 296 for 55. $55 of risk. Yes, there's risk in that. And you don't want to lose $55, but when you have narrow po narrow differences between strikes, it lets you fine-tune the risk you're taking. and really limit the the dollar risk you have on a trade. And I think that's important to a new trader. You're going to make mistakes. You're going to have losing trades. Just make sure those mistakes and losers aren't so aren't that costly. The third point is there are lots of expirations for these. Look at this. Look at the IWM here. their expiration with zero days, four days, five days expiration, 14 days, 42 days, 118 days. And the same is true for Q's and SPY. They all have lots of expirations to choose from. That does a couple of things. It lets you position your strategy to give yourself either more duration, in other words, more time for that trade to work out. So maybe I'll buy a call spread with 42 days or 49 days and give that trade a month and a half to work out. Or maybe I'll buy something closer, let's say seven days to have a more responsive trade. It's going to it's it's going to change in price faster than a longer term uh uh trade with more duration. That's your choice as a new trader and experimenting with different expirations is you'll learn a lot by doing that. And the other point is if I want to manage this trade, if I put on a trade with 42 days and time passes and well, let's say 30 days pass and now I have a a 14-day trade, I can roll it out to another expiration. I could roll it out to 28 days, 35 days, 42 days. So, the number of expirations gives you a lot of flexibility. All of that is a great way to learn about trading and you will learn skills trading SPY Q's and IWM that you can apply to individual stocks and even futures. So that's why I think if you are just starting out, you can start with SPY Q's and IWM. You can trade that for you can trade those things for a month, two months, six months and there's always something to learn. Get some trades under your belt and then start maybe experimenting, start looking outside those three into individual stocks or other ETFs. So, none of this is a trade recommendation. And if you're a new trader, maybe you want to use these three, maybe not. But those are the reasons why I think you should consider them. And if you do decide to trade these things, don't take any more risk than you are comfortable with.