It's easy in life to sometimes "miss the forest for the trees" - meaning one gets lost in the details, and misses the bigger picture.

However, the opposite can also happen - focusing on the bigger picture, without paying enough attention to the finer details.

Most of us follow the S&P 500 on a daily basis, and we can name some of the larger components in the index. However, some of the smaller components in the S&P 500, and their impact on the overall index, sometimes gets lost in the shuffle.

If you want to learn more about one of the world's most important stock indices, a new episode of Market Measures is without question worth a few moments of your time.

The purpose of the episode is to put the spotlight on some of the smaller components of the index, as well as the overall structure of the S&P 500, instead of focusing on Apple and Amazon - two companies which get constant coverage by traditional financial media.

Taking a step back, it's important to remember that the S&P 500 is a "weighted stock index," which means that companies with the highest market capitalization receive higher weighting. That in turn means that the larger companies exert more influence on the direction of the index.

The bullet points below illustrate that the top 100 companies in the S&P 500 make up 64% of the total weight, leaving only 36% for the remaining 400 companies:

  • Total weighting of Companies 1-100: 64%

  • Total weighting of Companies 101-200: 16%

  • Total weighting of Companies 201-300: 9%

  • Total weighting of Companies 301-400: 7%

  • Total weighting of Companies 401-500: 4%

Looking at a few underlying symbols from each of the above groups (and their respective price charts) we can see how the influence of the Top 100 plays such an integral role in the overall direction of the index:

Trading Big and Little Stocks
Trading Big & Little Stocks

As you can see in the images above, the S&P 500 and its largest components don't always tell the complete story of the "stock market." News Corporation (NWSA) has been moving in the exact opposite direction as the overall S&P 500 throughout 2018.

What this tells us is that there may be trading opportunities hidden within the S&P 500 that aren't often covered by traditional financial media outlets. This might include a directional play on a beat-up stock such as NWSA, or volatility play on one of the smaller S&P 500 components that helps balance out your overall portfolio of long and short premium positions.

A key to remember when trading any symbol, even those in the S&P 500, is to ensure that the underlying and associated options possess adequate liquidity, so that you can trade in-and-out at your convenience - not at the convenience of market makers and specialists.

On the balance of this episode of Market Measures, the hosts outline how smaller capitalized stocks in the S&P 500 tend to experience wider swings than the larger capitalized companies. However, they also present data that highlights how the smaller companies also tend to trade with higher implied volatility (on average) to compensate.

We hope you'll take the time to review the complete episode of Market Measures focusing on the S&P 500 components when your schedule allows.

If you have any questions above trading stock indices as opposed to single stocks, don't hesitate to send us a message @tastytrade on Twitter or email support@tastytrade.com at your convenience.

Thanks for reading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


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