We love to trade the different stock indices (S&P 500, Dow Jones, Nasdaq 100, Russell 2000, and S&P 100), either via the futures or the ETFs, so we studied what affects the indices and in this first part we describe the different ones and discuss how each is affected by implied volatility (IV). Part two will describe how each index reacts to different market environments.
A key part of Data Science is to use graphics to simplify complex concepts. Thankfully, we have Michael Rechenthin PhD, our in house Data Science expert, who lives up to his nickname of Dr. Data. The first graph showed where the implied volatility is on the different indices now. It was no surprise that the Russell 2000 (RUT) was the highest and the Dow Jones (DJI) the lowest as the RUT has the highest IV 82% of the time and either the DJI or the S&P 100 has the lowest 96% of the time.
Subsequent tables describe the stock composition of each index and that the DJI is price weighted while the others are weighted by market capitalization. The next graph shows the makeup of each index by the market cap of each with the RUT of course being made up of all small caps which is why it consistently has the highest IV. Some stocks are found in multiple indices. Mike makes the point that it’s important to know what type of overlap you have in your portfolio.
A graphical representation of the price weighted Dow Jones was displayed. Dr. Data noted how MMM has a much greater impact on the index than GE even though MMM’s market cap is a third of GE’s (it’s an old index). One hundred shares in the DIA equates to owning about four shares of Apple, etc. The final graphic was a handy table that shows the sector makeup of each index in percentage terms. You can see where you might have overlap and where you don’t. Utilities were singled out as not making up much of any of the indices.
Watch this segment of “The Skinny On Options Data Science” with Tom Sosnoff, Tony Battista and Dr. Data (Michael Rechenthin, Ph.D.) from the research team for the important takeaways and other valuable information in part 1 of what affects the Indices.
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