ETF Options Trading

http://www.options-trading-education.com/7114/etf-options-trading/ ETF Options Trading A common means to trading options on the state of the economy or on a given market sector is ETF options trading. An ETF is an exchange traded fund. These funds give traders a product that accurately tracks collections of stocks as big as the S&P 500 or specific sectors such as energy, oil, pharmaceuticals, and more. The fund buys and sells shares in order to retain its character as an accurate reflection of the value of the index or market sector that it attempts to track. ETFs are common investment and trading vehicles because of their low costs and the ability to trade their shares like stocks. ETF shares are traded on a large scale by so-called authorized participants, large brokers and dealers, under agreements with the ETF distributor. Smaller lots are traded on a secondary market. As with trading common stocks, ETF options trading uses calls and puts to stake out positions during the length of an options contract. Calls on the US Economy in ETF Options Trading If your belief is that the economy will improve and that the stock market in general will go up, you can buy calls in ETF options trading. Pick an ETF that tracks the broader market. Buying a call contract gives the trader the right to purchase the ETF shares in question at the contract price, known as the strike price. He or she can do this throughout the duration of the contract period when trading American style options. When trading European style options the trader can only execute the contract at the end of the contract period. However, in each case when trading ETF options the trader can exit the contract by executing the opposite trade on the same ETF with the same expiration date. If the market and ETF shares go up as anticipated, the trader profits in ETF options trading. At no time in ETF options trading is the buyer of a call contract obligated to purchase and will do so only if conditions warrant. Puts on the Oil Sector If a trader believes that stock prices will fall in tech stocks, pharmaceuticals, banking, or the oil sector he or she can pick an ETF that trades on a collection of stocks in the sector in question. Buying a put gives the trader the right to sell the ETF shares in question at a set price no matter how low that price might fall. This right is good throughout the contract period. As with calls, a trader can exit the contract prior to expiration by executing the opposite trade on the same ETF option with the same expiration date. And, as with calls, the trader is not obligated to sell and will not do so unless it leads to a profit. ETF Options Trading Strategies The same basic options strategies apply to ETF options trading as to trading options on individual stocks, commodity futures contracts, or foreign currencies. It is essential to have a clear idea of the fundamentals that drive the market and an accurate current assessment of market sentiment which tends to drive prices when the market is unsettled. http://youtu.be/KvluwiWQsbA

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