CHAPTER 14
Index Options
How do professional traders get the liquidity, pricing, and execution they need when they're moving millions of dollars in a single trade? It's certainly not by buying and selling mining company penny stocks. Many times the professional traders don't trade stocks; they trade markets. You think we are just referring to using ETFs as a proxy to a market, right? Actually, that's not the case. We're talking about trading markets like the S&P 500, Nasdaq 100, Dow Jones Industrial Average, S&P MidCap 400, and Russell 2000 through the use of index options.
As you'll see, trading an index is one of the purest forms of trading. After all, the forces that influence an individual stock's movements are quite random compared to the forces that can affect an entire index. For example, a stock's price can change dramatically based on comments from a talking head on a financial channel, an analyst upgrade or downgrade, a product announcement, or even the illness of a key executive. Factors like this have far less of an influence on an index simply due to its size. The impact of a significant event for one company is tempered by the fact that that company represents a minor part of the overall index.
When we teach a live class we often illustrate this point by likening a stock to a kayak and an index to a cruise ship. The kayak can move forward and backward and maneuver via the action of one person with a single paddle. That same person isn't going to change the direction ...
