We will be trading from a pool of 12 primary underlyings. Our primary large stock ETFs are QQQ, SPY, IWM and DIA. So, what are these you ask? Invesco QQQ is an Exchange Traded Fund (ETF) that tracks a modified market cap weighted index of 100+ NASDAQ listed stocks. These are typically high-tech stock names like Apple, Microsoft, NVIDIA, Amazon, Meta, Telsa and Alphabet. SPY is the SPDR S&P 500, which is an ETF that tracks a market cap weighted index of US large and mid-cap stocks selected by the S&P Committee. It’s currently got 504 holdings including Microsoft, Apple, Berkshire Hathaway, Eli Lilly and Broadcom. We will also trade IWM, which is the iShares Russell 2000 ETF that tracks a market cap weighted index of US small cap stocks. The index selects stocks ranked 1001-3000 by market cap. These are names like Abercrombie & Fitch, Sprouts Farmers Market, and Fluor. DIA is the SPDR Dow Jones Industrial Average ETF that tracks a price-weighted index of 30 large-cap US stocks, selected by the editors of the Wall Street Journal. DIA is made up of names like United Health, Goldman Sachs, Home Depot and Amgen. These four stock ETFs provide a lot of advantages. They have built in diversification due to their make-up. ETFs provide exposure to many stocks, and they trade like a stock, meaning they can be bought and sold throughout the day similar to stocks. Diversification shields you from single stock risks and provides exposure to multiple investment sectors and geographic regions. The best thing is it protects you from single stock quick downside moves, like earnings misses, analyst downgrades, mergers, or new lawsuits against the company. So, if Netflix craters over 20% overnight (which happened to me when I had a naked Put) you are somewhat protected with an ETF.
Although these names are correlated, they still offer some protection from total stock market risks. For example, many days QQQ and SPY may go up while IWM and DIA go down, and vice-versa. This is good for us. It would be easier to put all of your eggs in the QQQ basket, but you would have no underlying market protection so it’s better to spread the risk around with multiple ETFs. QQQ is the most liquid of the four with the tightest bid-ask spreads, which is excellent for trading. It also provides the best pricing, so we shoot for $.50 for our spreads in QQQ. Definitely start your trading with QQQ.
When your capital is available, then scale up from 1 to 12 underlyings. Start with QQQ. Then branch out into GLD, IWM, IBIT, SPY, USO, DIA, IYR, SMH, TLT, XBI and VIX (in that order). Rotate a Stock ETF then an alternative underlying in order to reduce correlation in aggregate as you scale. Note that VIX is a volatility measure that is a little more complex to understand, but it does offer great reverse correlation protection. I trade three commodities (Bitcoin, Gold, Oil), which do have single asset risks, but they provide diversification from your stock ETFs. For example, if there is a broad-based sharp stock market move downward, these commodities are largely uncorrelated, so they are insulated from the event. Additionally, I trade three asset classes (Bonds, Real Estate and Volatility) TLT, IYR and VIX. TLT is a Treasury Bond ETF, which again provides uncorrelated diversification. IYR is a Real Estate ETF. I also trade the VIX, which predominantly moves opposite of the stock market and provides negative market correlation, which is very valuable. The last two are specialty ETFs (SMH and XBI) which offer some correlation diversification. SMH is a Semiconductor ETF and XBI is Biotech.
I have tried lots of other underlyings and they all have problems. The biggest problems are they don’t trade weekly options, or a large enough market interest, or they have wide bid-ask spreads, or the values are too low (like EEM), or are single entity risks (like single stocks). I’ve tried trading many of them (around 70 names) and none work as well consistently as these 12. It is true that some single stock names (like AAPL) trade at a slightly higher premium than QQQ, but the difference is nominal, and the risk of single stocks is much higher. It is also true that DIA has slightly wider bid-ask spreads and doesn’t offer as high of premium, but it provides some diversification we are looking for so that outweighs the drawbacks. So, we are riding with these. You’ll understand more of the benefits as you proceed down the Put Path with me!
Put Paradise 