Why Etf Options Are Better Than Index Options?

ETF investing has become highly popular in the last two decades. ETFs or what you call Exchange Traded Funds give you the benefits of both mutual funds as well as stocks. Now, ETFs are a basket of securities that are tailored to track a particular index whether it be a stock index, market index, a sector index, a commodity index, a currency index or other.

You can trade options on ETFs as well. This makes ETFs a highly powerful addition to your portfolio. ETF Options are settled with the underlying instruments that is shares of ETFs. This gives you the chance to use various combination strategies with ETF Options that you cannot normally use with Index Options. Now trading ETF Options is somewhat different than trading Index Options. Though both track almost similar indexes but Index Options are settled in cash at expiry. Now when you are trading index options or ETF options both of them get affected by the dividend payments on the underlying stocks.

You need to take this fact into account when calculating the values of puts and calls with an Options Calculator otherwise your investment returns may not be what you have been anticipating.

If you have traded stock options before, trading ETF Options should not be difficult for you. As said before, since ETF Options get settled with ETF shares, you can use the different options trading strategies on them unlike the Index Options that get settled in cash. This makes ETF Options a much superior instrument as compared to Index Options. Using Protective Put Strategy by combining long ETF with a long put can hedge against the downside risk limiting it to the put strike price with a slightly increased cost for the ETF. Another options trading strategy is often used is the Covered Call. Covered means that you are covering the call with the stocks that you own and on which you have written the call.

You can use a Covered Call on ETF. A Covered Call is formed by taking combining long ETF with a short call on that ETF.

The short call will give you some income in the shape of a premium and reduce the cost of the position. This will also slightly reduce the risk of the position. But on the other hand, a covered call will limit the upside profit potential.

Your max profit now will only be limited to the call strike price. How about a Collared Position. This is another combination strategy that you can use with an ETF is forming a Collared Position. A Collared Position is formed with a long ETF and a long put combined with a short call.

The premium paid in taking a long put position is offset somewhat by the premium that you get by writing a call. A Collared Position limits the limited but high risk to a limited risk only.

The downside risk is now only limited to the put strike price. What you need to do is first paper trade these strategies and master them. This way you will learn how to deal with unexpected risk. Options trading is risky in the sense that it has both time volatility as well as price volatility. Now, many traders trade options without getting good options trading education. An important fact that you need to know is that not all ETFs have options written on them. This should not surprise you as there are many stocks that don't have options written on them. Another important fact that you should know is that ETF Options are always American Style. American Style options can be excercised anytime before expiry.

You can even trade LEAP Options on ETFs. LEAP Options are long term options having expiry of more than nine months to less than two and a half years.
Mr. Ahmad Hassam has done Masters from Harvard University. Read this 49 page Quantum FRWC Brutal Truth FREE Report that exposed everything about trading robots!

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