New Perspective: Indexes & Puts

Staying back has given me some perspective. A wider one perhaps, an unnecessary one maybe. It doesn’t matter though, I need to understand the why on everything I do, so to me it’s important.

I didn’t necessarily track the market today, but I did see that SPY was down horribly today. Someone I follow who trades SPY reported on it the whole day, and I knew that the entire market was red as a result. Everyday I am more convinced that I needed to sit this week doing nothing, just observing. I would’ve lost over 90% of my trading capital this whole week had I jumped on FOMO trains.

Today specifically, I realized that maybe put traders have been having a ball this week. How could they not? This thought alone made me realize that I needed to begin understanding how puts work as well, I know how calls work but I’ve never done a put call.

So I started investigating, not on puts to be precise but rather more broader topics like the different indexes and how to compare ETFs and single stocks against indexes. I arrived here because I got a news notification on NASDAQ joining the correction territory. From here I learned about SPX (a larger version of SPY), INDU, NDX. Where SPY is for most ETFs whereas NDX is for technology, and INDU is for industrials and financial.

Why is this relevant for me?

Well, in my previous analyses for my option trades, I’ve been comparing single stocks to their ETFs and SPY as well in order to understand what the relative strength is. However, for tech ETF and stocks, the best comparison is against NDX. This is something I didn’t know, but will now keep in mind. Similarly, the financial and industrial sectors are better compared against INDU. After learning about this, I learned about yet a fourth index VIX (volatility index).

As I always say, there is always something new to learn.

VIX is important because it can tell us about the market on a broader scale. It tells us about the volatility of the entire market. “The Coe Volatility Index (VIX) tracks the 30-day implied volatility of the S&P 500 based on SPX options. A higher VIX usually indicates an increased uncertainty or fear in the market” (robinhood). This means that when VIX is high, the indexes will be trending lower due to uncertainties. The opposite is true too, when VIX is down, we can assume the market is in better green health as there isn’t fear or uncertainty around it. Now, this is something I’ve touched on through the news — not VIX, but the uncertainties in the market with the current geopolitical state — and knowing that we can use an index to get a feel of the market is sound to say the least.

While I have literally just learned about VIX, and the rest of the indexes, I plan to utilize them as tools. I believe VIX alongside the analyses techniques I have use can give me a better read on where the market will be heading. Introducing this can give me a bit of insight into puts and calls.

So, does every trader need to know all this? Probably not. Especially day traders, I don’t think they care about the macro economics. I, nonetheless, desire to be one of the most successful, most profitable, and one of the best in the game. Which means, I’ll use every medium that gets me there.

This weekend I’ll look into VIX and analyze it against indexes, and historically understand how it’s played out. At the same time, I think it’s time to buy a slice of each index for long term investing.

There’s infinite knowledge and information, luckily my brain is also infinite.