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ETF Option Trading

ETF stands for Exchange Traded Fund. An ETF is a security that trades in the stock market just like a stock. Most ETFs also have options.

There are ETFs that represent almost any sector of the market - stock indexes such as the Dow 30 or S&P 500, stock sectors such as technology or retail or healthcare, and commodity sectors such as oil or gold or agricultural products.

There are "double" ETFs, that attempt to rise or fall twice the movement of an index or sector ETF.

There are "inverse" or "contra" ETFs that represent the opposite of the regular sector, such as ETFs that are designed to gain when the Dow 30 is falling, or that will gain if oil prices drop.

There are even ETFs that attempt to trade at double the inverse of certain sectors, such as an ETF that has approximately twice the upside move that the NASDAQ 100 has to the downside.

ETFs have many advantages for option traders, among them:

  1. Options on the most popular ETFs, such as the ones representing the popular indexes, trade in very large volume and have lots of liquidity. This makes entry and exit easier, as well as keeping bid-ask spreads reasonable.
  2. Many options on ETFs have strike prices at one point intervals, instead of the usual 2.5 or 5 point intervals used for most individual stocks. This makes it easier to target the specific move you expect, as well as set up strategies such as condors or butterflies much more easily.
  3. Since ETFs represent an index or a sector, the risk of dramatic overnight price movement is reduced compared to stock ownership or options on individual stock. An index can't report good or bad earnings, it can't go bankrupt or be bought out.
  4. Some of the most popular options on index ETFs have a quarterly expiration in addition to the normal monthly expiration. In addition to the normal "third Friday of the month" expiration, they have separate options that expire on March 31, June 30, September 30, and December 31. This gives more trading opportunities and more chances to roll. The availability of these quarterly options depends on your broker - not all brokers offer trading in the quarterlies.
  5. ETF options allow you to participate in the overall market direction, or to hedge other positions easily. For instance, if you have a number of positions in individual stock options that should gain in a rising market, you could hedge them all to some degree by purchasing an OTM double contra option on an index representing the overall market, such as the S&P 500. If the market rises as you expect, the OTM option may be an insignificant loss. If the market unexpectedly falls and damages your bullish positions, the OTM double contra option may show a good gain.
  6. Contra ETFs are an attractive alternative to shorting stock or buying puts. If you think the market is headed for a fall, or already in a bear market, you can buy contra ETFs or take bullish positions in options in contra ETFs, and your positions should rise when the market falls.

The table below is not an all-inclusive list of ETFs, but does show some of the more heavily traded ones. ETFs have various sponsors, not all of these are from the same sponsor. See the Option Information Links page for links to more ETF information.

Index or Sector represented
normal ETF
double ETF
contra ETF
double contra ETF
Dow 30

DIA

DDM DOG DXD
S&P 500 SPY SSO SH SDS
Nasdaq 100 QQQQ QLD
PSQ
QID
Financials XLF UYG   SKF
Russell 2000 IWM UWM RWM TWM
Emerging Markets EEM     EEV
Energy XLE      
Real Estate IYR URE   SRS
Oil & Gas   DIG   DUG
Gold GLD DGP DGZ  
Materials XLB      
Semiconductors SMH USD   SSG
Oil USO DXO   DTO
Technology XLK ROM   REW
Oil Service OIH      
S&P Midcap MDY      
Consumer Discretionary XLY      
Retail RTH      
Silver XLV      
Natural Gas UNG      
Homebuilders XHB      
Health Care XLV RXL    
Consumer Staples XLP      
Basic Materials   UYM   SMN
Regional Banks RKH      
Agriculture DBA DAG   AGA
US Dollar bullish UUP      
Utilities XLU UPW   SDP

 

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