ETFs are exchange-traded funds that track the performance of an index or sector, such as the DAX. As most share indices increase in value over the long term, ETFs are a popular vehicle for setting up a savings plan on these products. But ETFs are not only suitable for retirement provision. Options traders can also make very good use of ETFs. How? Alexander Eichhorn explains in this blog post.
What are ETFs?
ETFs are exchange-traded funds that reflect the performance of an index (usually a share index), such as the DAX or S&P 500. The main difference between an index fund and an index ETF is that they are listed on a stock exchange. ETF stands for Exchange Traded Fandsi.e. exchange-traded funds. They can be bought and sold continuously during trading hours and are therefore very cost-effective to trade. Index funds are not traded on a stock exchange.
Options trading with ETFs
The ETF product segment has experienced very strong growth in recent years. In the course of this success, the US stock exchanges have also offered ETF options for some ETFs in order to further strengthen the trading opportunities for ETFs. As a rule, an ETF option (like a share) has a contract value of 100 shares, i.e. 1 ETF option relates to 100 ETF shares.
Below we present the most popular index ETFs, which are also liquidly tradable with options:
- S&P 500 ETFs: SPY, IVV, VOO
- Nasdaq ETF: QQQ
- Russel-2000 ETF: IWM
- Dow Jones ETF: DIA
- MSCI World Index ETF: URTH
- DAX-ETF: DAX (ETF, very illiquid)
Many sector/industry ETFs are also suitable for this purpose:
- Technology ETF: XLK
- Healthcare ETF: XLV
- Biotechnology ETF: IBB
- Cyclical consumer goods ETF: XLY
- Communication Technology ETF: XLC
- Financial sector ETF: XLF
- Energy ETF: XLE
- Industry ETF: XLI
- Non-cyclical consumer goods ETF: XLP
- REIT ETFs: XLRE, VNQ
Tip: On etfdb.com many other ETFs can be filtered.
Exotic markets become tradable
If options traders want to trade in more exotic countries, country ETFs are an excellent choice. From Turkey to South Africa, various liquid ETFs are available to options traders.
- Turkey: TUR
- Brazil: EWZ
- Israel: EIS
- Australia: EWA
- India: INDA
The advantage here is that these ETFs are listed in the USA - so you don't have to worry about exchange rates, opening hours and fees. Options trading for the Turkey ETF TUR, for example, technically works in the same way as an option on Apple shares.
Cash Secured Put on an ETF?
In addition to stock options, options on ETFs can also be traded. Here, investors can sell puts in order to be offered the ETF in the event of delivery - basically a Cash Secured Put on ETFs. Here, investors receive 100 ETF shares in the event of a tender. If, for example, an investor sells a cash secured put (90 strike) on an ETF that is currently at $ 100, then in the event of a tender (price below $ 90) 100x ETF shares would be booked in at $ 90.
Let's take a practical example: If an options trader sells a 60 put option on the XLP (non-cyclical consumer goods index ETF), he would receive 100x ETF shares at a price of $ 60 in the event of a tender, which would correspond to an equivalent value of $ 6,000.
Chart: XLP-ETF
Commodity trades with options on ETFs
In addition to traditional equity ETFs, options on commodity ETFs can also be traded (strictly speaking, these are not ETFs, but ETCs - exchange-traded commodities). The contract values of options on commodity futures are often over $ 100,000, which is why ETCs can be a real alternative here. In addition, an ETC is not a futures product and therefore does not have to be rolled. Well-known commodity ETCs are
- GLD: Gold
- SLV: Silver
However, most commodity ETCs do not actually own the commodity, but trade the commodity futures. This means that long-term investing in these products is not advantageous due to the high rolling losses. With a few exceptions in the metals sector, we would therefore not use these products for a buy-and-hold strategy.
Advantages of options on ETFs:
- Often low capital investment
- Possible combinations with various option strategies
- Possible performance boost with income strategies such as Cash Secured Put and Covered Call
Disadvantages of options on ETFs:
- Only tradable during trading hours
- Possible tax disadvantages in the event of a tender
But a trading GmbH is not the holy grail for every trader; as always, it depends on the individual situation. A trading LLC is cost-intensive: formation costs, ongoing tax consultancy costs, Chamber of Industry and Commerce fees, ... You also need to watch out for pitfalls: For example, the disclosure of hidden reserves through a business split must be prevented! We have explained this in our wealth magazine described in detail.
Who soon emigrate should also consider setting up a trading company!
Alternative: Mirco-Futures
As an ETF alternative, options traders can also use the Micro futures for the major share indices. These newly introduced futures products can be traded from smaller accounts.
Examples:
In addition to the major share indices, there are also micro-futures on commodities with the MGZ future!
Conclusion - Options trading with index ETFs
Options trading on individual shares is very popular with investors, for example to buy shares at the desired price by Cash Secured Put or to receive an additional dividend in the form of a covered call. However, exactly these strategies also work with ETFs. With options trading on ETFs, ETFs can also be offered at the desired price or active trading strategies can be pursued. In contrast to the default risk of an individual share, index ETFs are less risky and therefore also suitable for beginners.
