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Small, Short-Term Plays in Equity Indices: Top Trade Q1 2022

Small, Short-Term Plays in Equity Indices: Top Trade Q1 2022

Katie McGarrigle, Contributor
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Despite trading near all-time highs, equity indices may be a source of volatility and two-sided action as changing interest rates, inflation, and COVID-variants are likely to continue dominating headlines in early 2022.

Volatility in Equity Indices

Source: tastytrade

Implied Volatility of Index ETFs 12/17/21

Implied volatility has been on the rise as 2021 comes to a close, and VIX levels have frequently been above 20 since late November ‘21. For this, traders can turn to a variety of strategies.

For those looking to capitalize on a collapse in volatility, premium selling strategies might be the play. Whether bullish, bearish, or neutral, the majority of options in equity index futures as well as ETFs are highly liquid.

Traders can also work on building high-probability options trades with known P/L on entry (also known as “defined risk”) or get a little more exposure to delta and theta with undefined risk setups. As the equity indices often display put skew, this may also impact options strategy selection.

Source: tastytrade

I believe these larger intraday ranges won’t be snuffed out just yet, and with that, there’s opportunity to play both sides.

Traders in larger accounts can stick to buying and selling the outright major futures contracts (/ES, /NQ, /RTY, IWM).

For traders new to short-term scalping and swing trading, there’s plenty of liquidity with less buying power required in the micro contracts (1/10th the size of the majors) and small futures.

With approximate 1 SD daily ranges of +/- 1.10 in the /SM75 and +/- 0.75 in /STIX, I’ll be looking to enter and exit long AND short positions as reversion plays should they start to deviate from those expected moves.

Source: The Small Exchange

--- Written by Katie McGarrigle, Host of Options Trading Concepts LIVE, tastytrade

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.