ETF or Exchange Traded Fund Option Trading Strategies

Futures traders have access to markets nearly around the clock. Stock and exchange traded fund (ETF) traders must deal with gaps in time and price when there is no market to trade or a huge drop in liquidity of those markets that do trade overnight. When liquidity is low, bid ask spreads are too. Entering an exchange traded fund option trading strategy late in the day may help reduce those gaps in time and price.

Avoid Gaps in Price and Time

There are gaps in price action for ETFs (and stocks) that do not typically occur in the futures markets. Therefore, a strategy focused on entering trades during the closing 30 minutes of the trading session could be integral for avoiding gaps in time and price.

Closes are often powerful directional signals for the next day or more. When scanning markets for breakout or trend potential, search for 4- to 5-day setups where the ranges are below average with severe price overlap (similar highs and lows) and small candle bodies (similar opens and closes). If these factors are realized, the market is primed to make a vertical move with an above average range. When odds favor a sharp vertical move, entering a trade late in the session can reduce risk and increase profit potential. In other words, avoid gaps in time and price.

See It, Believe It

Visuals help us retain lessons. The chart below shows a pre-trend setup in which the solid settle (green candle with long body) was the trigger to enter a long position. If we delayed entry until the next day, we would sacrifice a higher entry (poor trade location) and subsequently inherit more risk.

XLF Daily Candlestick Chart

Timing Trends

A trend can kick in anytime. When the timing is ripe for a breakout, it is imperative to have the ability to enter a trade at all hours. When charting price action, it is advantageous to watch futures for a continuous read on momentum. Many exchange traded funds track the commodity and futures markets. However, to enhance trade location and increase profit potential when trading stocks and ETFs, implementing a late day strategy can change profit potential and risk.

As a futures trader, I have the luxury of executing trades from Sunday night to Friday afternoon. This diminishes the pressure of perfect timing and handling risk. When dealing with stocks and ETFs, timing entry and exit positions requires more precision.

Perfect timing is illusive and the ambition for all traders. Trading is a high-pressure endeavor. To alleviate that tension, create an early entry strategy. This strategy requires patience and is implemented early in the trading session. Though it can reduce ideal trade location, a late day entry is useful when the pre-trend setup has already presented itself. A late day wager under the right conditions will alleviate pressure and poor entry levels. 

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.