Trading ETF Options : NobleTrading Blog

Tuesday, October 13, 2009

Trading ETF Options

Like futures contracts on exchange traded funds or ETFs, options contracts on the same are also available. Currently there are around hundred ETF options available for traders. ETF options can serve the dual purpose of limiting the downside risk of holding the ETFs and maximizing profitability. They also allow traders to buy or sell specific ETFs at a point of time in the future.

ETF options are very similar to stock options; the difference is that ETF options track specific exchange traded funds rather than specific stocks. They have all other specifications similar to stocks. Both call and put options are available and all the simple and complex trading strategies followed for trading stock options are also applicable to them.

Advantages of ETF options

Options let you fully explore one of the most liquid and diversified trading instruments, ETFs
Traders can use them to lock profits, explore short-term and long-term price trends, maximize the return from holding the ETFs or find the right buying/selling opportunities.
ETF options are suitable for both novice and experienced traders as a range of trading strategies are available.
There is no downside risk compared to directly buying/selling/holding ETFs.

Disadvantages of ETF Options

They are not suitable for all types of investors, especially very small-scale traders, and traders who are not comfortable with options & options strategies.
The opportunities an option offers depends on many things, like underlying instrument, expiration date, option premium, volatility, etc. Thus it might be hard to find the right opportunity at the right time.
The trading costs and option premium should also be considered.