Growth stocks (XLK) have seen a huge decline in volatility. The growth stock index, XLK, has declined from a peak implied volatility of 35% to 22%, whereas staples (XLP) has declined from 20% to 16%. The graphic below represents this change:
So how can we trade this market?
- Since volatility is low in XLK and has the potential of increasing at a faster rate—we can use a Calendarized Diagonal trade, which is getting long the back month and then selling the front-month expiration.
- With IV Ranks of 9% and 3% in XLP and XLK respectively, standard short premium trades such as credit spreads or strangles don’t collect much premium. Instead, traders may look to get directional, buying debit spreads.
- Price-wise, XLP is up 5% in 2021, XLK is up 6.5%. Both fall short of the overall S&P 500 which is up 12% YTD. With a historically slower-moving index—choose XLP. Want something with a bit more action, choose XLK.
Cherry Picks is written in collaboration with Michael Rechenthin, PhD, Head of Data Science at tastytrade; James Blakeway, CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade; and John Kicklighter, Chief Strategist at DailyFx with an expertise in fundamental analysis and market themes.