#19 - How To Pick Which ETFs To Invest In
Hey guys. Welcome back to the daily call here at Option Alpha. Today, we’re going to talk about how to pick which ETFs to invest in. I’ve mentioned before and often do mention that I like trading mostly ETFs versus stocks. It’s just something I’ve fallen into. I know a lot of guys and girls trade some stock and we won’t shy away from it. In fact, we’re in some stock trades right now. But most of what we do is in ETFs and people always ask how do we do this, which ETFs do we choose. The simple answer to this is we choose the highest implied volatility ETFs first. If we’re looking at our shortlist… You can use our watch list software. You just go to optionalpha.com/toolbox and you can check out our software. It’s like a one-time cost lifetime access for that. When we check out our watch list, we look and sort buy highest implied volatility first and then we filter for only ETFs. That’s the best way right now that we have to figure out which ETFs we want to be in. We just work down that list. Highest implied volatility first, we take trades there. If we already have positions, we keep moving down and try to grab the low-hanging fruit. Now, the only caveat to that is that we don’t want to be overly-allocated in a particular sector that has high implied volatility at the moment. A good example of this or a good way to discuss this is oil. If oil has high implied volatility, generally what we’ll see is maybe that whole sector has high implied volatility as well. There’s a lot of ETFs in the oil sector. You have XOP, USO, XLE, OIH, etcetera. We don’t want to be in all of those securities. We want to maybe pick one or two of those and then skip the rest. It’s not just as simple as saying, “Kirk said we have to do highest implied volatility and the highest 10 trades are oil, so I’m going to be all loaded up in oil.” We still want to have a little bit of diversity in our portfolio that we don’t invest in the same sector for all of our trades. That might be different for your account. I’m not saying it’s just one or two. But just rationally think about it as you’re building out your positions, is ask yourself, “Do I already have a position in oil? If I’ve already got three, do I need a fourth or fifth or sixth position in an oil-related ETF or maybe my overall portfolio would be better served if I have a position in say Homebuilders or in bonds with TLT or in the euro or China or something else.” That’s how we work through it. It’s top down, lowest hanging fruit first, but then also, we try to mix in a little bit of rationale thought as to making sure that we’re just diversified and have as many non-correlated ETFs in there as possible. Now of course, everything is a little bit correlated, but look, we try to reduce the friction and volatility in our account by trading everything in the same direction. Hopefully that helps out. As always, if you guys need anything, let me know. Until next time, happy trading!
