— For some traders it makes more sense to take on a little less risk in exchange for a little more certainty. —
There's no denying most option traders are looking for big gains. That's exactly what options do, in fact — they turn a stock's or an index's move into something much, much bigger. The whole point is applying leverage.
Just because you have access to leverage doesn't mean you have to use all the time though. Levers sometimes break, particularly when they're used inappropriately or too aggressively. In the same sense, taking bigger risks and aiming for bigger gains means little if you're more likely than not going to be on the wrong side of a move.
That's why BigTrends is pleased to begin doing more with less volatile tickers. The Blue Chip Options Advisory Service [1] is explicitly designed to trade more familiar households names with strong predictability profiles.
In other words, these stocks may not dish out enormous moves, but it's certainly easier to figure out where they're going next.
It's more than improved predictability though. Trading options on blue chips stocks — which also tend to be lower-beta tickers — also means using different kinds of trading strategies than we might utilize for a more aggressive name like Shopify or Roku. In fact, there are four major upsides in using blue chip names as the basis for option trading.
Less volatile
Low beta blue stocks generally exhibit lower volatility compared to the overall market. When trading options on low beta stocks, traders can expect relatively smaller price fluctuations, which can be advantageous in managing risk.
High beta stocks, conversely, tend to be more volatile than the overall market. Trading options on high beta stocks can provide opportunities for potentially larger price swings, which can result in higher profit potential but also increased risk.
Lower premiums
Options premiums (or prices) for low beta stocks are generally lower compared to high beta stocks. The lower volatility of low beta stocks leads to lower implied volatility levels, reducing the cost of options premiums. This can be favorable for options buyers who aim to minimize upfront expenses.
On the flipside, option premiums for high beta stocks tend to be higher due to their higher volatility. Increased volatility leads to higher implied volatility levels, resulting in higher options premiums. However, higher premiums may also offer greater potential returns for options sellers, who can take advantage of the increased volatility.
Easier to manage
Trading options on low beta stocks provides a certain level of downside protection. These stocks are generally more stable and less likely to experience sharp price declines. As a result, options traders can employ strategies such as protective puts or collars to mitigate potential losses.
Higher beta stocks, on the other hand, can carry higher risk due to their propensity for larger price swings. Options traders need to be cautious and consider risk management strategies such as stop-loss orders or hedging techniques to protect against significant adverse moves. The higher volatility in high beta stocks demands a more active risk management approach.
All-weather performance
Finally, blue chops stocks often perform better during periods of market uncertainty or downturns. Their stability and lower volatility can make them attractive to options traders seeking a more defensive or conservative approach during turbulent market conditions.
At the other end of the spectrum, high beta stocks tend to outperform during periods of market upswings or favorable economic conditions. These stocks can provide greater profit potential when the overall market is trending positively. Options traders looking for more aggressive strategies may find high beta stocks suitable during bullish market conditions, but the opposite is true in more turbulent times.
Strategy shakeup
To handle this different kind of trade, we use a different kind of trading algorithm. While all of BigTrends' option trade recommendations ultimately get the approval of one of our analysts, the pool of trading prospects is generated by a deep search of stocks that meet a very specific set of technical criteria.
In the case of the Blue Chip Options Advisory Service, the triggers for new trades start with a look at Exponential Moving Averages (EMAs) the and Directional Movement Index (DMI), both of which are well-suited for this kind of stocks. We also use daily charts as opposed to hourly or minute charts, which also makes more sense for this flavor of multi-day swing trading. (If you're look for more details than that… well, sorry, but some things have to remain proprietary.)
We can say that the approach works though. Our system has been rigorously back-tested looking at a sizeable but capped number of eligible stocks, just to ensure the underlying algorithm delivers consistent results.
If you'd like to learn more about this new and exciting offer that's unlike anything BigTrends has every offered before, call 1-800 BIGTRENDS (1-800-244-8736) or sign up for the Blue Chip Options Advisory Service here [1]. It's the lower-risk, less volatile recommendation service many of our long-time fans have been waiting for.